Answer:
a. What is the initial investment in the product? Remember working capital.
initial investment = $70,000 (plant and equipment) + $18,000 (increase in working capital) = $88,000
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 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.)
depreciation expense per year = $70,000 / 4 = $17,500
Cash flow year 1 = [($60,000 - $24,000 - $17,500) x 0.8] + $17,500 + ($18,000 - $12,000) = $14,800 + $17,500 + $6,000 = $38,300
Cash flow year 2 = [($40,000 - $16,000 - $17,500) x 0.8] + $17,500 + ($12,000 - $9,000) = $5,200 + $17,500 + $3,000 = $25,700
Cash flow year 3 = [($30,000 - $12,000 - $17,500) x 0.8] + $17,500 + ($9,000 - $6,000) = $400 + $17,500 + $3,000 = $20,900
Cash flow year 4 = [($20,000 - $8,000 - $17,500) x 0.8] + $17,500 + $6,000 = -$4,400 + $17,500 + $6,000 = $19,100
c. If the opportunity cost of capital is 10%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
using a financial calculator, NPV = -$3194.11
d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
8.07%
