Illustration 19: Playmates Ltd. manufactures toys and other short-lived fad items. The Research and Development Department has come up with an item that would make a good promotional gift for office equipment dealers. As a result of efforts by the Sales personnel, the firm has commitments for this product. To produce the quantity demanded Playmates Ltd. will need to buy additional machinery and rent additional space. It appears that about 25,000 sq. ft. will be needed; 12,500 sq. ft. of presently unused space, but leased at the rate of Rs. 3 per sq. ft. per year is available. There is another 12,500 sq. ft. adjoining the facility available at the annual rent of Rs. 4 per sq. ft. The equipment will be purchased for Rs. 9, 00,000. It will require Rs. 30,000 in modification and Rs. 1, 50,000 for installation. The equipment will have a salvage value of about Rs. 2, 80,000 at the end of the third year. It is subject to 25% depreciation on Reducing Balance Basis. The firm has no other assets in this block. No additional general overhead costs are expected to be incurred. 57 Estimates of revenue and costs for this product for three years have been developed as follows: Particulars Sales Year 1 Year 2 Year 3 10,00,000 20,00,000 8,00,000 Less: Costs: Material, Labour and Overheads Overheads Allocated Rent Depreciation Total Costs Earnings before taxes Less: Taxes Earnings after taxes 4,00,000 7,50,000 3,50,000 40,000 75,000 35,000 50,000 50,000 50,000 2,70,000 2,02,500 NIL 7,60,000 10,77,500 4,35,000 2,40,000 9,22,500 3,65,000 84,000 3,22,875 1,27,750 1,56,000 5,99,625 2,37,250 If the company sets a required rate of return of 20% after taxes, should this project be accepted? Note : P.V. factor @ 20% for Year 1 = 0.833; Year 2 = 0.694; and Year 3 = 0.579