Rainbow is manufacturing plush toys. The firm thinks that manufacturing of plastic toys would be profitable. Marketing department made a marketing research that costs $$30\mathrm{.}000.$ After that research Rainbow is determined for the production. New toy requires a new machine. New toys will be produced in the facility of the firm which was bought $5$ years ago. This facility can be sold for $$150\mathrm{.}000($after taxes$)$ now.

New machine costs $$200\mathrm{.}000$ to buy. It has $5$ years of useful life and can be sold for $$30\mathrm{.}000$ at the end of usedful life $($straight line depreciation$).$ The manufacturing units will be $5000$ in the first year, $8000$ in the second year, $12000$ in the third year, $10000$ in the fourth and $6000$ in the fifth year. These toys will be sold for $$30$ per unit. Prices will increase by $\%2$ in each year. The cost of manufacturing is $$10$ in the first year and will increase by $\%10$ in each of the following years. Tax rate: $\%20$

Net working capital is the difference between current assets and current liabilities. Rainbow knows that it will need raw materials before manufacturing and it will also have some cash as a caution. Credit sales will also increase.

In the year of investment the net working capital requirement is $$10\mathrm{.}000$ net working capital amount will be $1.$ Year: $$10\mathrm{.}000,2$nd year $$16320,3.$ year $$24970,4.$ year $$21\mathrm{.}200,$ last year it will be $0.$

Target capital structure is $\%40$ debt, $\%60$ equity. The firms should issue bonds with a coupon rate of $\%20$ and a nominal value of $$1000,$ the price of bonds are $$950,$ the flotation cost is $$50$ per bond. Company paid $$2$ of dividend per share recently and the expected growth rate is $\%8,$ the price of share is $$12$ per share and the flotation cost is $$2$ for the new issues. For equity financing this firms should issue shares.

Compute the cash flows,

wacc,

npv and IRR.

Should this project be accepted? Why?

Draw NPV profile graph.

Tip: Take the difference between the specific year and the previous year to calculate the change in net working capital each year.

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