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Revenues generated by a new fad product are forecast as follows:
Year Revenues
1 $40,000
2 30,000
3 20,000
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 $45,000 in plant and equipment.
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?
c. If the opportunity cost of capital is 12%, what is project NPV?
d. What is project IRR?

Sagot :

Anthougoidn

Answer:

a. The initial investment in the product = $53,000

b. The project cash flows in each year:

Year   Annual Net

        Cash Inflow

1          $12,900

2            11,300

3            9,700

4           11,250

c. The NPV is  ($18,435).

Explanation:

a) Data and Calculations:

Year   Revenues   Cost       Working Expenses  Depreciation   Net  Income

                                              Capital                      Expenses    Income  Tax

0                         $45,000    $8,000   $0              $0

1         $40,000                       6,000    16,000      11,250       $12,750 $5,100

2          30,000                       4,000    12,000      11,250           6,750   2,700

3          20,000                       2,000     8,000      11,250              750      300

4          10,000                        0            4,000       11,250         -5,250 -5,250

Total $100,000 $45,000   $20,000 $40,000  $45,000    $15,000 $2,850

Year Revenues  Cash Expenses Working  Income Tax     Annual Net

                                                       Capital                           Cash Inflow

1       $40,000       $16,000            $6,000      $5,100            $12,900

2        30,000          12,000              4,000        2,700               11,300

3        20,000           8,000              2,000           300               9,700

4        10,000            4,000                      0      -5,250              11,250

Opportunity cost of capital = 12%

Year    Initial Cost         Annual Net      PV Factor      Present Value

        of equipment       Cash inflow

0           $45,000                                       1                     -$53,000

1                                         12,900             0.893                 11,520

2                                         11,300             0.797                  8,984

3                                         9,700              0.712                  6,906

4                                        11,250              0.636                  7,155

Total NPV                                                                         ($18,435)

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