Wizmo technologies is producing a new kids watch, an electronic gadget for kids to stay connected...

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Wizmo technologies is producing a new kids watch, an electronic gadget for kids to stay connected with their parents. The project requires an initial investment in plant and equipment of 6 million. This investment will be depreciated straight-line over five years to a book value of zero. But when the project comes to an end at the end of five years, the equipment will, in fact, be sold for 500,000. Wizmo believes that working capital at each date must be maintained at 10% of next year's forecasted sales, starting at time 0. For example, if the sales amount at time 1 equals 2 million, then the level of working capital at time 0 would be 0.2 million. Working capital is fully recovered at time 5. Production costs are estimated at 25% of sales. Sales forecasts (in millions) are as follows: Time Sales 0 0 1 2.0 2 3 4 5 2.4 4.0 4.0 2.4 The firm pays a tax rate of 25%, and the discount rate is 12%. What is the NPV of the project? b. Suppose the NPV of the project is paid out to Wizmo's shareholders as a lump sum dividend. Their shareholders also have the objective of improving the ESG impact of their investments and consider donating 50% of the NPV (as found in part a) to an initiative focusing on the reduction of electronic waste caused by short battery lifespans. Alternatively, the same impact could be achieved by Wizmo incorporating a higher-quality battery into the gadget. The use of a higher-quality battery would increase the production costs from 25% to 30% of sales. Holding everything else constant, who do you think should deliver on the ESG objective, Wizmo, or their shareholders? To answer this, please compare the NPV of the adjusted project to 50% of the initial project NPV. Aside: Part b of this question is meant to be a simplified NPV example within the current debate about enlightened shareholder value. Other differences could be incorporated, for example, different tax treatments of shareholder donations versus a firm changing their cost structure to improve on ESG ratings. Such differences are not being considered in the above example. Wizmo technologies is producing a new kids watch, an electronic gadget for kids to stay connected with their parents. The project requires an initial investment in plant and equipment of 6 million. This investment will be depreciated straight-line over five years to a book value of zero. But when the project comes to an end at the end of five years, the equipment will, in fact, be sold for 500,000. Wizmo believes that working capital at each date must be maintained at 10% of next year's forecasted sales, starting at time 0. For example, if the sales amount at time 1 equals 2 million, then the level of working capital at time 0 would be 0.2 million. Working capital is fully recovered at time 5. Production costs are estimated at 25% of sales. Sales forecasts (in millions) are as follows: Time Sales 0 0 1 2.0 2 3 4 5 2.4 4.0 4.0 2.4 The firm pays a tax rate of 25%, and the discount rate is 12%. What is the NPV of the project? b. Suppose the NPV of the project is paid out to Wizmo's shareholders as a lump sum dividend. Their shareholders also have the objective of improving the ESG impact of their investments and consider donating 50% of the NPV (as found in part a) to an initiative focusing on the reduction of electronic waste caused by short battery lifespans. Alternatively, the same impact could be achieved by Wizmo incorporating a higher-quality battery into the gadget. The use of a higher-quality battery would increase the production costs from 25% to 30% of sales. Holding everything else constant, who do you think should deliver on the ESG objective, Wizmo, or their shareholders? To answer this, please compare the NPV of the adjusted project to 50% of the initial project NPV. Aside: Part b of this question is meant to be a simplified NPV example within the current debate about enlightened shareholder value. Other differences could be incorporated, for example, different tax treatments of shareholder donations versus a firm changing their cost structure to improve on ESG ratings. Such differences are not being considered in the above example.