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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?
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You must show your work when solving these problems. Please use the cash flow method from the examples in the content, unless you are already familiar with another method and can show your work using the steps of that method.
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