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 I

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 II

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. Manufacturing unfinished toy cars for Happy-Toys.

2. Manufacturing and selling a new water toy to be added to its own product line.