Question: :>
Ocean Company is a toy company it produces a variety of toys for newborn babies & children up to 10 years old. Last year the company hired a consultant
at a cost of $2200000 to estimate the development of painting kits. The consultant pointed out that a new launch of painting kits would be able to stimulate
sales of the company. Additional sales revenue of $22400000 per year will be generated by this new product. The expenditure incurred in this new product is
listed below:
If the company accepts this new product the annual cash expenses of the company will increase from $84000000 to $86800000.
The company has to borrow $40000000 from a bank. The bank offers the company 8% interest and additional interest expenses of $3200000 each year.
Additional inventory of $8400000 will be incurred for the new product.
The new machine will cost $50400000 with a useful life of four years. The company applies the simplified straight-line method over the useful life period.
This new machine should be installed before the new project formally starts.
Assume the marginal tax rate is 18% and the required rate of return for the company is 10%. As the finance manager of the company you are required to review
this project.
Review and decide whether the following items are relevant cash flows for the project or not.
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(a)
i) The consulting fee: $2200000
ii) The increase in inventory: $8400000
iii)Additional interest expense: $3200000 per year.
(b)Develop a capital budgeting analysis to determine whether the company should accept this project.
***Would you kindly please to show the calculation steps clearly in order to get full credit.***
Million Thanks!!!