Question 6 Jocelyn Chen & Bosco Lau Toys has developed a new children's 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: Year 0 Items Total sales Operating costs 0 0 1 20000 8000 2 3 4 24000 28800 34560 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 2 54000 30000*20% = 6000 54000*20% 24000 = 43200 10800 3 43200 43200*20% = 8640 34560 4 34560 6912 27648 b. Compute the operating cash flows for each year. c. What is the NPV of this project? Should the firm undertake it?
Question 6 Jocelyn Chen & Bosco Lau Toys has developed a new children's 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: Year 0 Items Total sales Operating costs 0 0 1 20000 8000 2 3 4 24000 28800 34560 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 2 54000 30000*20% = 6000 54000*20% 24000 = 43200 10800 3 43200 43200*20% = 8640 34560 4 34560 6912 27648 b. Compute the operating cash flows for each year. c. What is the NPV of this project? Should the firm undertake it?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question 6
Jocelyn Chen & Bosco Lau Toys has developed a new children's 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:
Year 0
Items
Total sales
Operating costs
0
0
1
20000
8000
2
3
4
24000
28800
34560
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
2
54000
30000*20% = 6000
54000*20%
24000
=
43200
10800
3
43200
43200*20% = 8640
34560
4
34560
6912
27648
b. Compute the operating cash flows for each year.
c. What is the NPV of this project? Should the firm undertake it?
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