JuciCo is considering introducing a new fad toy, Topico. The new product is expected to generate annual

Question:

JuciCo is considering introducing a new fad toy, Topico. The new product is expected to generate annual revenue of $520,000, with direct materials cost of $182,000, direct labour $156,000, and overhead cost of $104,000. In order to produce Topico, JuciCo will need to purchase new equip-ment costing $300,000. The equipment will be used for 5 years, as JuciCo expects that interest in the toy will be stopped by then. The equipment will have no residual value after 5 years. To insure a smooth operation, JuciCo expects that the project will increase working capital by $8,000 at the beginning, which will be recovered at the end of the five years. In addition, it will cost JuciCo $8,000 to remove the equipment and clean up the facility. JuciCo’s policy is to accept investment projects that have a 3-year payback period. JuciCo’s required rate of return is 7%.

Required:

A. What is the payback period for this investment?

B. What is the net present value for this investment?

C. What is the internal rate of return for this investment?

D. What is the accrual accounting rate of return?

E. Should JuciCo proceed with this project? Please support your recommendation based on your calculations.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...