Investment Capital
5. Revenues generated by a new fad product are forecast as follows:
| Year | Revenues |
| 1 | $40,000 |
| 2 | 20,000 |
| 3 | 15,000 |
| 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 $46,000 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 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years.
c. If the opportunity cost of capital is 10%, what is the project’s NPV?
d. What is project IRR?
Complete this question by entering your answers in the tabs below.
· Req A
· Req B
· Req C and D
What is the initial investment in the product? Remember working capital.
| Initial investment
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