Hawk Surfboard Company is considering the launch of a new surfboard featuring waterproof flashing lights. The Company thinks the new surfboards will be a hot product for a while and then people will lose interest and move on to another fad. The company expects that they will discontinue making the light-up surfboards after 6 years. The firm spent $500,000 in R&D last year and is confident the lights will work. The Company considered that the sale of this new surfboard could cannibalize some of the sales from its existing line of products, but management has decided that most buyers will just add a light-up board to their existing fleet "for fun" and will not consider it a replacement to their other boards. Assignment: Given the information attached, (i) calculate the after-tax Free Cash Flows associated with the project; () calculate the project's Net Present Value; (II) calculate the Profitability Index; (iv) calculate the IRR; (v) state whether the Company should Accept or Reject the project. There are two parts to the assignment. In Part A, use the Straight Line Depreciation Method. In Part B, use the Bonus Depreciation Method. HAWK SURFBOARD COMPANY LIGHT-UP SURFBOARD PROJECT INFORMATION Company's Cost of Capital Company's Tax Rate 15% 21% Cost of Manufacturing Equipment, Including installation $12,000,000 Projected Unit Sales Units Sold Year 6,000 12,000 12,000 12,000 8,000 3,000 Sales Price per unit Variable Cost per unit $835 $360 $575,000 Annual Fixed Costs There will be an initial working capital requirement of $600,000, which will be released at the termination of the project after five years. Working Capital Method for Part A: The cost of the manufacturing equipment will be depreciated using the straight- line method for five years (i.e., divide the cost of the equipment into equal amounts for each of 6 years) Depreciation Method: Method for Part B: The cost of the manufacturing equipment will be depreciated using the Bonus Depreciation Method. Salvage Value: The equipment will have a salvage value at the end of the project of $1,000,000 after taxes. Hawk Surfboard Company is considering the launch of a new surfboard featuring waterproof flashing lights. The Company thinks the new surfboards will be a hot product for a while and then people will lose interest and move on to another fad. The company expects that they will discontinue making the light-up surfboards after 6 years. The firm spent $500,000 in R&D last year and is confident the lights will work. The Company considered that the sale of this new surfboard could cannibalize some of the sales from its existing line of products, but management has decided that most buyers will just add a light-up board to their existing fleet "for fun" and will not consider it a replacement to their other boards. Assignment: Given the information attached, (i) calculate the after-tax Free Cash Flows associated with the project; () calculate the project's Net Present Value; (II) calculate the Profitability Index; (iv) calculate the IRR; (v) state whether the Company should Accept or Reject the project. There are two parts to the assignment. In Part A, use the Straight Line Depreciation Method. In Part B, use the Bonus Depreciation Method. HAWK SURFBOARD COMPANY LIGHT-UP SURFBOARD PROJECT INFORMATION Company's Cost of Capital Company's Tax Rate 15% 21% Cost of Manufacturing Equipment, Including installation $12,000,000 Projected Unit Sales Units Sold Year 6,000 12,000 12,000 12,000 8,000 3,000 Sales Price per unit Variable Cost per unit $835 $360 $575,000 Annual Fixed Costs There will be an initial working capital requirement of $600,000, which will be released at the termination of the project after five years. Working Capital Method for Part A: The cost of the manufacturing equipment will be depreciated using the straight- line method for five years (i.e., divide the cost of the equipment into equal amounts for each of 6 years) Depreciation Method: Method for Part B: The cost of the manufacturing equipment will be depreciated using the Bonus Depreciation Method. Salvage Value: The equipment will have a salvage value at the end of the project of $1,000,000 after taxes
