Revenues produced by the new fad product are predict as follows:
Year 1 : 40,000
Year 2: 30,000
Year 3: 20,000
Year 4: 10,000
Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20 percent of revenues in following year. Product needs the immediate investment of $45,000 in plant and equipment.
a. Determine initial investment in product?
b. If plant and equipment are depreciated over 4 years to salvage value of zero by using straight-line depreciation, and ﬁrm's tax rate is 40%, prepare down project cash ﬂows in each year?
c. If opportunity cost of capital is 12 percent, compute project NPV?
d. Determine project IRR?