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wants to market its newSlamDunk Basketball Goal Set To bring this 15%. product to the market will require the purchase of equipement costing $650,000. Shipping be $50.000. Management will deduct the shipping and Installation expense right away, at time Q. In additios, Clyme Indastries will incur training and recrulting expenses of $100,000, all of which will be incurred at cime 0 Additional net working capital investments of $50,000 will be required at a time 0. $25,000 in year 1, and $10,000 in year 2. Revenues are expected to be $350,000 i year 1 and grow at a rate of $25,000 per year through year 3. In years 4 and S and installation expenses A Memily the iscremsental benets and costs of the sew preject and provide an analysis that management could use to decide whether to go foeward on the SlamDunk peoject, (20 potn) with the are estimated to $25,000 per year until the project is terminated in year S and a 60 percent chance that sales will continue to increase at the rate of $25,000 per year untl the project is terminated in year 5 Annual operating expenses are expected to be 40 percent of expected sales. Incremental cash fixed costs caused by the project are $140,000 per year. will be under MACRS for a 5-year class asset. The salvage value of the The company plans to pay Matt Painter, the Purdue basketball coach, a fee for endorsing the basketball goal set. The fee is set at $30,000 per year of the project The company bas already paid Mr. Painter $20,000 for taking the time to study the product and give his professional opinion on the marketablity of the SlamDunk product Clyne Industries currently owms an unoccupied building SlamDunk operation. The building is fuly depreciated an In which it can install the has a current market value est has been thinking a to proceed with the SlamDunk project it will not sell the building right away. Management believes that at the end of the five project, the building will still have a market value of $10,000 and would be sold at about selling the building. If it decided As a result of going forward with the SlamDunk project, the company expects to lose $10,000 in sales per year of its HokeyPokey basketball goal set The EBIT/SALES margin on those sales is 30%. The company expects to incur annual cash interest expense of $20,000 if this project is adopted. But it also plans to pay an annual cash dividend of $10,000. Clyne Industries wants to market its new SlamDunk Basketball Goal Set. To bring this product to the market will require the purchase of equipment costing $650,000. Shipping and installation expenses associated with the equipment are estimated to be $50,000. Management will deduct the shipping and installation expense right away, at time 0. In addition, Clyne Industries will incur incremental employee training and recruiting expenses of $100,000, all of which will be incurred at time 0 Additional net working capital investments of $50,000 will be required at a time 0, $25,000 in year 1, and $10,000 in year 2. Revenues are expected to be $350,000 in year 1 and grow at a rate of $25,000 per year through year 3. In years 4 and 5, management believes that there is a 40 percent chance that sales will decline by $25,000 per year until the project is terminated in year 5 and a 60 percent chance that sales will continue to increase at the rate of $25,000 per year until the project is terminated in year 5. Annual operating expenses are expected to be 40 percent of expected sales. Incremental cash fixed costs caused by the project are $140,000 per year Depreciation will be under MACRS for a 5-year class asset. The salvage value of the equipment at the end of 5 years is expected to be $50,000. The company plans to pay Matt Painter, the Purdue basketball coach, a fee for endorsing the basketball goal set. The fee is set at $30,000 per year of the project. The company has already paid Mr. Painter $20,000 for taking the time to study the product and give his professional opinion on the marketability of the SlamDunk product. Clyne Industries currently owns an unoccupied building in which it can install the SlamDunk operation. The building is fully depreciated and has a current market value of $10,000. The building has no alternative use and management has been thinking about selling the building. If it decided to proceed with the SlamDunk project it will not sell the building right away. Management believes that at the end of the five year project, the building will still have a market value of $10,000 and would be sold at that time. As a result of going forward with the SlamDunk project, the company expects to lose $10,000 in sales per year of its HokeyPokey basketball goal set. The EBIT/SALES margin on those sales is 30%. The company expects to incur annual cash interest expense of $20,000 if this project is adopted. But it also plans to pay an annual cash dividend of $10,000. The marginal, ordinary tax rate is 40 percent. The required return on the project is 15%. A. Identify the incremental benefits and costs of the new project and provide an analysis that management could use to decide whether to go forward on the SlamDunk project. (20 points)
