Determine the initial investment in the product

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Problem: Revenues generated by a new fad product are forecast as follows:

Year Revenues

Year 1: $50,000

Year 2: $35,000

Year 3: $30,000

Year 4: $20,000

Thereafter 0

Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $60,000 in plant and equipment.

Required:

a. What is the initial investment in the product? Remember working capital.

b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years.

c. If the opportunity cost of capital is 10%, what is the project's NPV?

d. What is project IRR?

Reference no: EM132466627

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