Question: Problem 9-14 Project Evaluation (LO2) Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $60,000 2 40,000 3 30,000 4

Problem 9-14 Project Evaluation (LO2)

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

Year	Revenues
1	$60,000
2	40,000
3	30,000
4	10,000
Thereafter	0

Expenses are expected to be 30% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $81,000 in plant and equipment.

Required:

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 firms 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 project IRR?

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