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Question - Revenues generated by a new fad product are forecast as follows:
Year Revenues
1 $46,000
2 30,000
3 20,000
4 10,000
Thereafter 0
Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 30% of revenues in the following year. The product requires an immediate investment of $51,000 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 firm's tax rate is 40%, 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 15%, what is the project's NPV?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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Simple Interest, Compound interest, discount rate, force of interest, AV, PV
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