Question
Jocelyn Chen & Bosco Lau Toys has developed a new childrens toy. The project will last for 4 years. The total sales for the first
Jocelyn Chen & Bosco Lau Toys has developed a new childrens toy. The project will last for 4 years. The total sales for the first year are $20,000 and the annual real growth rate of total sales is 20%. Operating costs are expected to be 40% of the sales revenues. Sales and operating costs numbers are presented in the following table:
Items | Year 0 | 1 | 2 | 3 | 4 |
Total sales | 0 | 20000 | 24000 | 28800 | 34560 |
Operating costs | 0 | 8000 | 9600 | 17280 | 20736 |
The product requires an immediate investment of $60,000 in plant and equipment today. The expected nominal salvage value of the plant and equipment at the end of 4 years is $0. Plant and equipment is depreciated at 20% per year. The standard half-year depreciation rule applies. The corporate tax rate is 40% and annual discount rate for all cash flows is 12%. a. Compute the Initial UCC, annual CCA and End of Year UCC. Put your numbers in the following table:
Year | Initial UCC | CCA | Ending UCC |
1 | 30000 | 30000*20% = 6000 | 24000 |
2 | 54000 | 54000*20% = 10800 | 43200 |
3 | 43200 | 43200*20% = 8640 | 34560 |
4 | 34560 | 6912 | 27648 |
c. What is the NPV of this project? Should the firm undertake it?
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