Revenues generated by a new fad product are forecast asfollows:
| Year | Revenues |
| 1 | $40,000 |
| 2 | 30,000 |
| 3 | 10,000 |
| 4 | 5,000 |
| Thereafter | 0 |
|
Expenses are expected to be 40% of revenues, and working capitalrequired in each year is expected to be 20% of revenues in thefollowing year. The product requires an immediate investment of$42,000 in plant and equipment.
a. What is the initial investment in theproduct? Remember working capital.
b. If the plant and equipment are depreciated over4 years to a salvage value of zero using straight-linedepreciation, and the firm’s tax rate is 20%, what are the projectcash flows in each year? Assume the plant and equipment areworthless at the end of 4 years. (Do not round intermediatecalculations.)
c. If the opportunity cost of capital is 10%, whatis the project's NPV? (A negative value should be indicatedby a minus sign. Do not round intermediate calculations. Round youranswer to 2 decimal places.)
d. What is project IRR? (Do not roundintermediate calculations. Enter your answer as a percent roundedto 2 decimal places.)
