Expenses are expected to be 50 of revenues and working...

Expenses are expected to be 50% 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 $40,000 in plant and equipment. Required: What is the initial investment in the product? Remember working capital. 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? If the opportunity cost of capital is 12%, what is project NPV? What is project IRR?

Transcript

00:01 To everyone that is sales minus production cost.

00:15 For year 0, 0, year 1 it will be 2, 0, 0, 0, 0, minus 0 .25 into 2, 0, 0, 0, 0, 0.

00:29 So, it will be equals to dollar 1, 5, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0, 0.

01:09 So, it is initial investment, so dollar 6, 0, 0, triple, 0 by useful life 5.

01:17 So, it will be dollar 1, 2, 0, 0, 0, 0, 0 per year.

01:22 Third one is calculate the profit before tax.

01:26 So, profit before tax, it is revenue minus depreciation.

01:32 So, revenue minus depreciation for year 0 it is 0 minus dollar 1 2 double 0 triple 0 so it will be equals to minus dollar 1 2 double 0 triple 0.

01:48 For year 1 it is dollar 3 double 0 triple 0.

01:52 For year 2 it is dollar 6 double 0 triple 0.

01:58 For year 3 1 8 double 0 triple 0.

02:02 Year 4 it will be same and year 5 it is dollar 6 double 0 triple 0 1 8 double 0 triple 0 all these in dollar.

02:17 So profit after tax profit after tax it is profit before tax into 1 minus 0 .25.

02:28 It is profit before tax into 1 minus 0 .25.

02:33 Now cash flow.

02:36 Cash flow is here is profit after tax plus depreciation.

02:41 So year 0 it will be 0.

02:44 Year 1 dollar 1 5 double 0 triple 0.

02:50 Year 2 it will be dollar 1 8 double 0 triple 0.

02:56 Year 3 dollar 3 triple 0 triple 0.