You work for mattel a profitable toy manufacturer and you

Question

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.