Problem 3: The Early Start Learning Essentials Company :

The Early Start Learning Essentials Company has been a family run company for the last 30 years. It is well recognized in the state of Michigan for selling educational related toys specifically for children, ages 6 through 12. Once a year, Early Start goes through an extensive analysis as to which new learning product they should promote for the upcoming year. They always have room for only one new product promotion because they will drop the poorest selling product, automatically, from their product line. Glendolene, Carlos, and Danora Mae, Market Experts employed by Early Start Essentials Company, have prepared the following information regarding their suggestions as to which educational product should be promoted next during the upcoming year.

Toys to be Considered	Rosie Reader	Melvin Mathkid	Homer History
Initial Investment	$60,000	$65,000	$58950
Annual Cash Flows	$18,000	$19,250	NIA
Number years flow expected to continue	5	7	NIA
SalvageValue	0	$3,000	0
Lump-Sum Payment	0	0	$144,000 at end of 5th year

Additional Information:

The hurdle rate of return is 8 per cent. The current rate of interest available on long-term securities is 4 per cent. The educational products are mutually exclusive; Early Start will only have funding to promote the product with the best capital return.

1. Rank these investment opportunities using NPV, Payback method and IRR: 1 =highest, 2 = middle, 3 = lowest. Show all computations in good form.

2. Suppose that Early Start had a capital budget of $125,000 annually AND the toys were not mutually exclusive. Would your answer change as to which educational product you would recommend they promotes? Show all narrative and computations in good form.