Revenues generated by a new fad product are forecast as follows: Year Revenues 1$ 45,000 2 40,000 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 30% of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment. Required: What is the initial investment in the product? Remember working capital. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 40%, what are the project cash flows in each year? If the opportunity cost of capital is 15%, what is project NPV? What is project IRR?
Revenues generated by a new fad product are forecast as follows: Year Revenues 1$ 45,000 2 40,000 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 30% 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 40%, what are the project cash flows in each year? If the opportunity cost of capital is 15%, what is project NPV? What is project IRR?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 21P
Related questions
Question
![Revenues generated by a new fad product are forecast
as follows: Year Revenues 1 $
45,000 2 40,000 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
30% 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 40%, what are the project cash
flows in each year? If the opportunity cost of capital is
15%, what is project NPV? What is project IRR?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0cb455f1-4939-452e-ab1d-001eaa401fe3%2F17b6057e-f98e-48fd-b34f-cd31ac36b66c%2Fy9oqyhc_processed.png&w=3840&q=75)
Transcribed Image Text:Revenues generated by a new fad product are forecast
as follows: Year Revenues 1 $
45,000 2 40,000 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
30% 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 40%, what are the project cash
flows in each year? If the opportunity cost of capital is
15%, what is project NPV? What is project IRR?
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Financial And Managerial Accounting](https://www.bartleby.com/isbn_cover_images/9781337902663/9781337902663_smallCoverImage.jpg)
Financial And Managerial Accounting
Accounting
ISBN:
9781337902663
Author:
WARREN, Carl S.
Publisher:
Cengage Learning,
![Managerial Accounting](https://www.bartleby.com/isbn_cover_images/9781337912020/9781337912020_smallCoverImage.jpg)
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Financial And Managerial Accounting](https://www.bartleby.com/isbn_cover_images/9781337902663/9781337902663_smallCoverImage.jpg)
Financial And Managerial Accounting
Accounting
ISBN:
9781337902663
Author:
WARREN, Carl S.
Publisher:
Cengage Learning,
![Managerial Accounting](https://www.bartleby.com/isbn_cover_images/9781337912020/9781337912020_smallCoverImage.jpg)
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
![Cornerstones of Cost Management (Cornerstones Ser…](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
![Intermediate Financial Management (MindTap Course…](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning