Answered

At Westonci.ca, we connect you with experts who provide detailed answers to your most pressing questions. Start exploring now! Connect with a community of experts ready to provide precise solutions to your questions quickly and accurately. Experience the convenience of finding accurate answers to your questions from knowledgeable experts on our 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 hope this information was helpful. Feel free to return anytime for more answers to your questions and concerns. We appreciate your time. Please come back anytime for the latest information and answers to your questions. We're glad you visited Westonci.ca. Return anytime for updated answers from our knowledgeable team.