NPV, IRR, initial investment calculations
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Revenues generated by a new fad product are forecast as follows:
Year Revenues
1 $65,000
2 50,000
3 40,000
4 30,000
Thereafter 0
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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.
a. What is the initial investment in the product? Remember working capital.
Initial investment= $ ___________
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? (Enter your answers in thousands of dollars. Do not round intermediate calculations. Round your answers to 2 decimal places.)
Year Cash Flow
1 $ _______
2 $_________
3 $__________
4 $_________
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c. If the opportunity cost of capital is 15%, what is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
NPV= $______________
d. What is project IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
IRR = _____________%
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