Question
In: Finance
The Pixar Corporation has an opportunity to sell Buzz Lightyear flying action figures. Woody, the CEO,...
The Pixar Corporation has an opportunity to sell Buzz Lightyear flying action figures. Woody, the CEO, would like for Rex, the vice president, to evaluate the project. Mr. Potato Head, operations manager, believes the equipment will cost $600,000 with shipping and installation being another $75,000. Mr. Potato Head believes the cost will be $3.50 per unit or 35% of sales plus a fixed cost of $75,000. Mr. Potato Head estimates inventory will be increased by $82,500. Mr. Potato Head believes after the four-year run of action figures, the equipment will be worth $125,000. Bo Peep, marketing manager, believes that the demand for the Buzz Lightyear flying action figures will be 80,000 units in the first year, 65,000 in the second year, 40,000 units in the third year and 25,000 in the fourth year. Bo Peep tells Rex that she believes the price will be $10 per unit. Slinky Dog, the CFO, says the equipment will fall under the 3-years MACRS schedule. Slinky Dog believes accounts payable will increase by $8,000 and accounts receivable will decrease by $20,000. Slinky Dog tells Rex that the corporate tax rate is a flat 38%. Hamm, assistant financial accountant, says the required return on a project of this type should be 16%. Rex needs to report the NPV, IRR, Payback and the accept/reject decision to Woody.
Solutions
Expert Solution
| Pixar | 0 | 1 | 2 | 3 | 4 |
| MACRS % | 33.33% | 44.45% | 14.81% | 7.41% | |
| Unit Sales | 80000 | 65000 | 40000 | 25000 | |
| Investment | -$675,000.00 | ||||
| Salvage | $ 125,000.00 | ||||
| NWC | -$ 54,500.00 | $ 54,500.00 | |||
| Sales | $ 800,000.00 | $ 650,000.00 | $ 400,000.00 | $ 250,000.00 | |
| VC | -$280,000.00 | -$227,500.00 | -$140,000.00 | -$ 87,500.00 | |
| FC | -$ 75,000.00 | -$ 75,000.00 | -$ 75,000.00 | -$ 75,000.00 | |
| Depreciation | -$224,977.50 | -$300,037.50 | -$ 99,967.50 | -$ 50,017.50 | |
| EBT | $ 220,022.50 | $ 47,462.50 | $ 85,032.50 | $ 37,482.50 | |
| Tax (38%) | -$ 83,608.55 | -$ 18,035.75 | -$ 32,312.35 | -$ 14,243.35 | |
| Profits | $ 136,413.95 | $ 29,426.75 | $ 52,720.15 | $ 23,239.15 | |
| Cash Flows | -$729,500.00 | $ 361,391.45 | $ 329,464.25 | $ 152,687.65 | $ 205,256.65 |
| NPV | $38,071.90 | ||||
| IRR | 18.98% | ||||
| Payback | 2.25 |
Net Working Capital = Increase in Inventory + Increase in Receivables - Increase in Payables
= 82,500 - 8,000 - 20,000 = 54,500
Depreciation = Investment x MACRS%
Sales = Unit sales x $10, VC = Unit Sales x 3.50
Cash Flows = Investment + NWC + Profits + Depreciation + Salvage x (1 - tax rate)
NPV and IRR can be calculated using the same function in excel or calculator with 16% discount rate.
Payback Period is the no. of years it take to recover the investment.
As NPV > 0 and IRR > 16%, accept the project.
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