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Revenues generated by a new fad product are forecast as follows:
Year Revenues
Year 1 $40,000
Year 2 $30,000
Year 3 $20,000
Year 4 $5,000
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 $49,000 in plant and equipment.
Required:
Problem a. What is the initial investment in the product? Remember working capital.
Problem 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.
Problem c. If the opportunity cost of capital is 10%, what is the project's NPV?
Problem d. What is project IRR?
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corporate ethics and fraud have received much media attention through reporting of scandals at major corporations. you
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