An electronic toy manufacturer from overseas is planning to set up a plant in Australia and has collected some information on the project. The machinery will cost $2,000,000 and will be fully funded by the owner's capital. The annual running costs will include (i) repairs and maintenance of $45,000 and (ii) administrative overheads of $300,000. The direct cost of producing one electronic toy is $35. The selling price of each toy is $85. He is planning to sell 25,000 toys per annum.
The director of the toy manufacturing business is concerned with the feasibility of this project, and has the following concerns and questions.
(a) How many toys must the company sell to break-even in the first year?
(b) Given the nature of the industry competition and technology, he is planning 3-year horizon for his project. Assuming a cost of capital of 10%, determine whether the project is viable using Net Present Value approach.
(c) Calculate the return on equity per annum based on the annual production plan.
(d) Determine and discuss whether the return on equity calculated in (c) compared with the competitor. [the competitor's return on equity can be obtained by doing some internet research on a toy business's financial highlights]