1. ABC Media is a movie company that is considering entering the toy business

in a short-term (3-year) venture. The venture will have an initial capital investment of

$45 million and you have been provided with the following projections on the venture

(in millions):

123

Revenues$50$65$70

- Depreciation$15$12$8

- Allocated G&A$10$10$10

- Other Operating Expenses$20$22$26

Operating Income$5$21$26

• You have been told that 75% of the G&A expenses are fixed (i.e., they have

nothing to do with this project) and non-cash working capital is expected to be 10% of revenues, with the investment being made at the end of each year.

• At the end of year 3, you can expect to sell all of the project's remaining assets at

book value.

• The average beta for toys companiesis5 andaverage industry debt to equity ratio is 50%. The marginal tax rate is 40%.
• Assume that you will finance this project 100% equity, the market risk premium 4% and risk free rate 4%.

1. Estimate the incremental after-tax operating cash flows each year for the life of

the project.

1. What is the NPV of this investment?
2. Assume that the toy business will generate side benefits for the movie business,

increasing after-tax cash flows from that business by $7.5 million/year, each year

for the next 3 years. What effect does this have on your NPV?