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Liberty University *

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530

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Finance

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Feb 20, 2024

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Uploaded by ProfOkapiPerson648

Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment. Required: What is the initial investment in the product? Remember working capital. . 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 30%, what are the project cash flows in each year? . If the opportunity cost of capital is 12%, what is project NPV? . What is project IRR? cpow Complete this question by entering your answers in the tabs below. Req C Req A Req B aeiD What is the initial investment in the product? Remember working capital. s o, Initial investment [ 2 12| 55,400 Explanation: Some values below may show as rounded for display purposes, though unrounded numbers should be used for actual calculations. . Initial investment = Investment in plant and equipment + Investment in net working capital = $50,000 + (0.10 x Year 1 sales) =$50,000 + (0.10 x $54,000) = $55,400 o . Cash flow year £ OCF + Change in net working capital = [(Revenues — Cash expenses) X (1 — Tax rate)] + (Tax rate X Depreciation) — [0.10 X (Next year's sales — This year's sales)] = {[554,000 x (1-050)1x (1 -030) } +[030 x (5_52_ )1-10.10 (530.000 - s54‘000)1 = $25,050 Cash flow year 2= OCF + Change in net working capital _ $50, = {[530,000 x (1-050)1x (I -030) } +[030 X (_‘,— ~10.10 x (520,000 — $30,000)] = 515250 Cash flow Year 3 OCF + Change in net working capital . _ _ $50.000, _ = _{[szo,ooox(l 0.50)1x(| 0.30)}+[o.30x(—,— 0.10 x ($10,000 — $20,000 )] = $11,750 Cash flow Year 4 OCF + Change in net working capital = {[510.000x (1 -050)]x (1 —0.30)} +[030 X (%’— —10.10% (50—510.000)1 = §8,250 C. NPV = -$55,400 + $25,050 + 1.12 + $15,250 + 1.122 + $11,750 + 1.123 + $8,250 + 1.124 = -$7,270.28 d. To compute IRR, use trial and error or a financial calculator to solve for r in the following equation: $25,050 + 1 + r + $15,250 + (1 + r)2 + $11,750 + (1 + nS + $8,250 + (1 + n% = $55,400 = IRR = 4.27% Calculator computations: CFO0 = -55,400 CO1 =25,050, FO1=1 CO2 = 15,250, FO2 =1 CO3 = 11,750, FO3 =1 CO4 = 8,250, FO4 =1 1=12 CPT NPV = -7,270.28 CPTIRR =4.27

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