Exercise #5

Exercise #5 - Finance 351: Financial Management Instructor:...

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1 Finance 351: Financial Management Instructor: Shuming Liu In-Class Exercise 5 Chapter 9 Question 21 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? Answer: a. Working capital = 20% × $40,000 = $8,000 Initial investment = $45,000 + $8,000 = $53,000 b. All figures in thousands of dollars
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Exercise #5 - Finance 351: Financial Management Instructor:...

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