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Waldo Entertainment Products, Inc. is negotiating with Disney for the rights to manufacture and sell |superhero-themed toys for a three-year period. At the end of year 3, Waldo plans to liquidate the assets from the project. In addition to the facts and assumptions below, assume that working capital must be invested immediately (in year 0) and will be fully recovered at the end of year 3, and that no incremental overhead expense will be incurred from the project. Note that the difference between the selling price of the equipment at the end of year 3 and the equipment's book value at the time of the sale is a taxable gain. Identify the relevant cash flows, then calculate the investment's net present value, benefit-cost ratio, and internal rate of return Facts and assumptions (S thousands) Marketing research costs, to date Initial cost of new equipment Expected life of equipment (years) Salvage value Depreciation me thod Selling price of new equipment at the end of year 3 Incremental annual sales (years 1 through 3) Incremental annual production costs Incremental annual selling and administrative expenses Current annual overhead costs Tax rate Working capital required $45,000 $250,000 5 $50,000 Straight-line $150,000 $350,000 $170,000 $55,000 $200,000 25% $60,000 $40,000 $25,000 Increase in A/R Increase in Inventories Increase in A/P Minimum required rate of return 14% Year 1 3 Investment in equipment Investment in net working capital Sales Cost of sales Gross profit Selling and administrative expenses Operating income Depreciation Income before tax x Income after tax Free cash flow Net present value Payback period Accounting rate of return Benefit-cost ratio Internal rate of return Waldo Entertainment Products, Inc. is negotiating with Disney for the rights to manufacture and sell |superhero-themed toys for a three-year period. At the end of year 3, Waldo plans to liquidate the assets from the project. In addition to the facts and assumptions below, assume that working capital must be invested immediately (in year 0) and will be fully recovered at the end of year 3, and that no incremental overhead expense will be incurred from the project. Note that the difference between the selling price of the equipment at the end of year 3 and the equipment's book value at the time of the sale is a taxable gain. Identify the relevant cash flows, then calculate the investment's net present value, benefit-cost ratio, and internal rate of return Facts and assumptions (S thousands) Marketing research costs, to date Initial cost of new equipment Expected life of equipment (years) Salvage value Depreciation me thod Selling price of new equipment at the end of year 3 Incremental annual sales (years 1 through 3) Incremental annual production costs Incremental annual selling and administrative expenses Current annual overhead costs Tax rate Working capital required $45,000 $250,000 5 $50,000 Straight-line $150,000 $350,000 $170,000 $55,000 $200,000 25% $60,000 $40,000 $25,000 Increase in A/R Increase in Inventories Increase in A/P Minimum required rate of return 14% Year 1 3 Investment in equipment Investment in net working capital Sales Cost of sales Gross profit Selling and administrative expenses Operating income Depreciation Income before tax x Income after tax Free cash flow Net present value Payback period Accounting rate of return Benefit-cost ratio Internal rate of return
