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Project Evaluation

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Revenues generated by a new fad product are forecast as follows:

Year 1 : 40,000
Year 2: 30,000
Year 3: 20,000
Year 4: 10,000
Thereafter: 0

Expenses are expected to be 40 percent of revenues, and working capital required in each year
is expected to be 20 percent of revenues in the following year. The product requires an immediate
investment of $45,000 in plant and equipment.

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 percent, what are the project cash
flows in each year?
c. If the opportunity cost of capital is 12 percent, what is project NPV?
d. What is project IRR?

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