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Question - Revenues generated by a new fad product are forecast as follows:
Year
Revenues
1
$44,000
2
30,000
3
20,000
4
10,000
Thereafter
0
Expenses are expected to be 50% 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 $48,000 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 40%, 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 15%, what is the project's NPV?
D. What is project IRR?
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