Answered

Get reliable answers to your questions at Westonci.ca, where our knowledgeable community is always ready to help. Join our Q&A platform and get accurate answers to all your questions from professionals across multiple disciplines. Get detailed and accurate answers to your questions from a dedicated community of experts on our Q&A platform.

Revenues generated by a new fad product are forecast as follows:
Year Revenues
1 $40,000
2 30,000
3 20,000
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 $45,000 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 40%, what are the project cash flows in
each year?
c. If the opportunity cost of capital is 12%, what is project NPV?
d. What is project IRR?

Sagot :

anthougo

Answer:

a. The initial investment in the product = $53,000

b. The project cash flows in each year:

Year   Annual Net

        Cash Inflow

1          $12,900

2            11,300

3            9,700

4           11,250

c. The NPV is  ($18,435).

Explanation:

a) Data and Calculations:

Year   Revenues   Cost       Working Expenses  Depreciation   Net  Income

                                              Capital                      Expenses    Income  Tax

0                         $45,000    $8,000   $0              $0

1         $40,000                       6,000    16,000      11,250       $12,750 $5,100

2          30,000                       4,000    12,000      11,250           6,750   2,700

3          20,000                       2,000     8,000      11,250              750      300

4          10,000                        0            4,000       11,250         -5,250 -5,250

Total $100,000 $45,000   $20,000 $40,000  $45,000    $15,000 $2,850

Year Revenues  Cash Expenses Working  Income Tax     Annual Net

                                                       Capital                           Cash Inflow

1       $40,000       $16,000            $6,000      $5,100            $12,900

2        30,000          12,000              4,000        2,700               11,300

3        20,000           8,000              2,000           300               9,700

4        10,000            4,000                      0      -5,250              11,250

Opportunity cost of capital = 12%

Year    Initial Cost         Annual Net      PV Factor      Present Value

        of equipment       Cash inflow

0           $45,000                                       1                     -$53,000

1                                         12,900             0.893                 11,520

2                                         11,300             0.797                  8,984

3                                         9,700              0.712                  6,906

4                                        11,250              0.636                  7,155

Total NPV                                                                         ($18,435)

We appreciate your visit. Hopefully, the answers you found were beneficial. Don't hesitate to come back for more information. Thank you for your visit. We're committed to providing you with the best information available. Return anytime for more. Your questions are important to us at Westonci.ca. Visit again for expert answers and reliable information.