4.. Net Present Value. (CMA adapted) Crescent Industries is a toy manufacturer that will have excess capacity at its single plant after 20x2. Crescent's management is currently studying two alternative proposals that would utilize the excess capacity. Proposal Crescent has been approached by Happy-Toys, one of its competitors, to manufacture a partially completed toy car. Happy-Toys, owner of the distribution rights for the toy car, would finish the cars in its plant and then market the cars. The Happy-Toy car would not compete directly with any of Crescent's products. Happy-Toys would contract to purchase 5,000 unfinished cars each month at a price of $7.50 each for the period of 20x3 through 20x6. Crescent's estimated incremental cash outlays to manufacture the car would be $250,000 per year during the four-year contract period. In addition, this alternative would require a $400,000 investment in manufacturing equipment. The equipment would have no salvage value at the end of its useful life. Proposal 11 Crescent is considering the production of a new water toy to be added to its own product line. The new water toy would be sold at $15 per unit and the expected annual sales over the estimated six-year product life (20x3-20x8) for the toy are as follows: Annual Unit Year Sales 20x3 65,000 20x4 90,000 20x5 90,000 20x6 65,000 20x7 50,000 20x8 50,000 The variable unit manufacturing and selling costs are estimated to be $6.00 and $1.00 respectively over the six-year period. The estimated annual incremental cash outlay for fixed costs would be $300,000. The manufacture and sale of the new water toy would require a $700,000 investment in new manufacturing equipment; this equipment would have a salvage value of $50,000 at the end of the six-year period. Additional information relative to a decision between the two proposals follows: Manufacturing equipment for either proposal would be placed in service during December 20x2. Depreciation on the equipment would be recognized starting in 20x3. Straight-line depreciation over the life of the proposal would be used for book purposes and ACRS for three-year property would be employed for tax purposes. The ACRS personal property rates are presented below. ACRS Tables for Three-Year Property Year 1-25% Year 2-38% Year 3-37% Crescent's management assumes that annual cash flows occur at the end of the year for evaluating capital investment proposals. Crescent uses a 16 percent after-tax discount rate. Crescent is subject to a 30% income tax rate. REQUIRED: Calculate the net present value at December 31, 20x2 of the estimated after-tax cash flows of Crescent Industries' proposal of: 1. 2. Manufacturing unfinished toy cars for Happy-Toys. Manufacturing and selling a new water toy to be added to its own product line
