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Revenues generated by a new fad product are forecasted as follows:
year revenues
1 60,000
2 45,000
3 30,000
4 10,000
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 30%, what are the project cash flows each year? Assume the plant and equipment are worthless at the end of 4 years.
C. If the opportunity cost of capital is 15%, what is the project's NPV?
D. What is the project IRR?
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