Answer:
a. What is the initial investment in the product?
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 30%, what are the project cash flows in each year?
- NCF₁ = $25,050
- NCF₂ = $15,250
- NCF₃ = $11,750
- NCF₄ = $8,250
c. If the opportunity cost of capital is 12%, what is the project's NPV?
d. What is project IRR?
Explanation:
year cash flows costs working capital
0 -$50,000 -$5,400
1 $54,000 -$27,000 $3,000 (+$2,400)
2 $30,000 -$15,000 $2,000 ($1,000)
3 $20,000 -$10,000 $1,000 (+$1,000)
4 $10,000 -$5,000 $0 (+$1,000)
net cash flow year 1 = [($54,000 - $27,000 - $12,500) x 0.7] + $12,500 + $2,400 = $25,050
net cash flow year 2 = [($30,000 - $15,000 - $12,500) x 0.7] + $12,500 + $1,000 = $15,250
net cash flow year 3 = [($20,000 - $10,000 - $12,500) x 0.7] + $12,500 + $1,000 = $11,750
net cash flow year 4 = [($10,000 - $5,000 - $12,500) x 0.7] + $12,500 + $1,000 = $8,250
I calculated the NPV and IRR using a financial calculator
