Revenues generated by a new fad product are forecast as follows: YearRevenues 1....................................$40,000 2......................................30,000 3......................................20,000 4......................................10,000 Thereafter.................................0
Question:
Revenues generated by a new fad product are forecast as follows:
YearRevenues
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?
Salvage ValueSalvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
a Working capital 20 x 40000 8000 Initial investment ...View the full answer
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus
