The Indica Company Indica originally established in 1962 to make toys is now a leading producer of curios and toys. In 1990 the company introduced ‘high flite’ its first line of high-performance balls. The Indica management has sought opportunities in whatever businesses seem to have some potential for cashflow. In 1999 Mahesh, VP of the Indica identified another segment of the sports ball market that looked promising but highly competitive and served by larger manufacturers. The market was for brightly colored radiant balls and he believed a large number of young people valued appearance and style above performance. He also believed that it would be difficult for competitors to take advantage of the opportunity because of Indica’s cost advantages and ability to use its highly developed marketing skills. As a result in late 1999 Indica decided to evaluate the marketing potential of the radiant colored balls. Indica engaged a leading consulting firm to assess the market for the balls. The report of the consulting firm revealed that the market for the brightly colored balls was very good, less competitive and supported the conclusion that the product could achieve a 10 to 15 percent share of the toys market. The cost incurred by Indica towards the consulting fee and other related expenses were Rs. 150,000. Further the consultants indicated that due to this launch Indica’s current sales will be hit by around 10% amounting to Rs 50,000 on a cashflow basis. The Indica is now considering investing in a machine to produce bright colored balls. The balls will be produced in a building owned by the firm. The building is currently vacant and housing the project saves it Rs 10,000 monthly rent. The original purchase price of the property less depreciation is zero. Working with his staff, Mahesh is preparing an analysis of the proposed new product. He summarizes his assumptions in the following table:

Cost of Machinery and equipment Rs. 1000,000

Life of the project 5 Estimated market value of the machinery Rs. 150,000

Expected sales (no.s) during the life of the project

Year 1 7000

Year 2 10000

Year 3 14000

Year 4 12000

Year 5 8000

The price of the ball in the first year will be Rs. 102 each. The market is competitive so Mahesh believes that the price will increase at only 5% per year. Conversely the raw materials used to produce the colored ball are rapidly growing at 10% per year. Production cost in the first year will be Rs. 50. The management of Indica believes that the investment in the different items of working capital will be Rs. 15,000 and the company is in the 35% tax bracket. Is this project worthwhile at 20% required rate of return?