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    Capital Budgeting-NPV and IRR

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

    Year Revenues
    year 1: $40,000
    year 2: $30,000
    year 3: $20,000
    year 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 $45,000 in plant and equipment.

    a. What is the initial investment in the product? Remember working capital.

    b. If the plant and equipment depreciated over 4 years to a salvage value of zero using straight-line depreciations, and the firm's tax rate is 40%, what are the project cash flows each year?

    c. If the opportunity cost of capital is 12%, what is the project NPV?

    d. What is the project IRR?

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    Solution Summary

    The NPV and IRR are calculated to evaluate a project