Problem 2: New project cash flows Maurice Toy Company is considering the production of a new game. The initial investment required to purchase the necessary equipment is $750,000. The equipment requires $50,000 in net working capital support. If the game is a success, the first years sales will be $300,000 and the company will continue production for another year. If the product is successful the sales will be $500,000 in the second year thru 5 years. The equipment will be sold for $10,000 at the end of the 5th year. Costs are 50% of sales. The corporate tax rate is 45%. The company uses the 5 year class MACRS depreciation schedule. The required rate of return on projects is 12%. The depreciation schedule. Yr. Depreciation Basis: $750,000 1 $150,000 2 $240,000 3 $142,500 4 $90,000 5 $82,500 6 $45,000

The depreciation schedule.

Yr. Depreciation Basis: $750,000

1	$150,000
2	$240,000
3	$142,500
4	$90,000
5	$82,500
6	$45,000

A. What is CF0 ( Initial cash flow) ? Show work.

C. What are the operating cash flows from years 1 -5? Show all work:

OCF1	= (S C)(1-T) + T ( D)
OCF2
OCF3
OCF4
OCF5

D. What is the terminal cash flow in the last year excluding operating cash flows? Show work.

E. Should Maurice invest in the new toy (NPV)? Show work and justify. CF0 C01 C02 C03 C04 C05 I/Y NPV IRR Explain.

F. How would the concept of risk impact this analysis?