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Revenues generated by a new fad product are forecast as follows:
Year 1 Revenue: 40,000
Year 2 Revenue: 30,000
Year 3 Revenue: 20,000
Year 4 Revenue: 10,000
Thereafter: 0
Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $53,000 in plant and equipment.
Required:
Question a. What is the initial investment in the product? Remember working capital.
Question 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.
Question c. If the opportunity cost of capital is 12%, what is the project's NPV?
Question d. What is project IRR?
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