A&T Ltd designs and manufactures toys. The companys product development team has spent $20,000 to design a new toy range with a product life of three years. A&T Ltd estimates the operating cash inflows for the new toy will be $210,000 each year for the three years.

A&T Ltd will need to purchase additional machinery costing $600,000 at the beginning of the first year to manufacture the new toy. The useful life of the machinery will be three years. At the end of year 3, it is estimated that the salvage value of the machinery will be $100,000. Additional working capital of $30,000 will be required at the beginning of the first year to support the new operation. This amount is expected to be recoverable at the end of year 3.

A&T Ltd has a Weighted Average Cost of Capital (WACC) of 10% per annum.

You may assume all transactions are on a cash basis and occur at the end of the year, except for the initial investments that would take place immediately.

Ignore tax.

Required:

(a) Conduct a net present value analysis for the new toy range. Show your workings.

(6 marks)

Description of cash flow	Time	Cash Flow	Discount Factor	Present Value
NPV

(b) Based on the NPV analysis, state whether A&T Ltd should invest in this new project.

(1 mark)