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FinanceQ&A LibraryRevenues generated by a new fad product are forecast as follows:YearRevenues1$50,000235,000330,000420,000Thereafter0Expenses 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 $60,000 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 the project IRR?Question

Asked Nov 7, 2019

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Revenues generated by a new fad product are forecast as follows:

Year | Revenues |

1 | $50,000 |

2 | 35,000 |

3 | 30,000 |

4 | 20,000 |

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 $60,000 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 the project IRR?

Step 1

**Part a:**

Given that the product requires an immediate investment of $60,000 in plant and equipment.

The working capital required in each year is expected to be 20% of revenues in the following year, and the revenue in the year 1 is $50,000.

Step 2

**Answer: The initial investment in the product is $70000**

Step 3

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