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You work for Mattel a profitable toy manufacturer and you are negotiating with Warner Brothers for the rights to manufacture and sell Harry Potter lunchboxes you already sell related action figures

You work for Mattel, a profitable toy manufacturer, and you are negotiating with Warner Brothers for the rights to manufacture and sell Harry Potter lunchboxes (you already sell related action figures). Your marketing department estimates that you can sell $800 million worth of lunchboxes per year for 3 years, starting next year. At the end of year 3, you will liquidate the assets of the business.          
Given the following information about this new product investment, identify the relevant cash flows, and calculate the investment's net present value, benefit-cost ratio, and internal rate of return. Make whatever assumptions you feel necessary and explain them briefly.        
  ($ in thousands)                  
  Marketing Research Costs, to date   $         20,000                
  Initial cost of new equipment   $       300,000                
  Licensing rights to use images (To be expensed for tax purposes at time 0) $       350,000                
  Expected life   5 yrs                
  Salvage value   0                
  Depreciation method   Straight-line over 5 years to 0 salvage value          
  Selling price of new equipment in 3 years*   $       130,000                
  Incremental annual sales   $       800,000                
  Incremental annual production costs   $       200,000                
  Incremental annual selling                    
       and administrative costs   $         80,000                
  Current annual overhead costs   $       200,000                
  Immediate advertising expenses for launch (To be expensed for tax purposes at tme 0) $       190,000                
  Tax rate   40%                
  Working capital required, as a % of production costs   7.50% (Needed at time 0.)            
  Minimum required rate of return   10%                
  *The company must pay a 40% tax on the difference between the selling price and the asset's book value at time of sale.          

Apr 30 2020 View more View Less

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