You are the financial manager of Toy Store Ltd. The company is planning to introduce a...

     

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You are the financial manager of Toy Store Ltd. The company is planning to introduce a new range of educational toys called the Edu-Fun. The production of the new range will be at the company's factory in Johannesburg. Management has made projections for the project for its three year lifespan. All income and expenses are cash flows unless it is clearly shown otherwise. Forecasted performance per year Cash sales Cost of Sales Gross profit Interest paid Depreciation Other costs 2020 R'000 3 000 (1 000) 2 000 (250) (200) (600) Net profit In addition, there is the following information: 950 2021 R'000 7 000 (3 000) 4 000 (300) (200) (600) 2 900 2022 R'000 8 000 (3 000) 5 000 (350) (300) (600) 3 750 • The advertising campaign for the new range has not been taken into account in the projections set out above. A big advertising campaign costing R2 million is planned for the start of the project as part of the initial cost and another campaign costing R1 million is planned for the end of year two (2021). In addition, a budget of R500 000 per annum for the three years has been put aside for day-to-day advertising. Other costs that have not been taken into account is R300 000 which relates to a portion of the factory manager's salary that will be allocated to this product line. To engage in this project, the company will need to purchase a new machine costing R500 000. In addition, significant replacement of parts of the new machine is expected at the end of the second year that will cost R200 000. In the year of 2021, the machine will be disposed of for a market value of R250 000. • You can accept that depreciation has been correctly calculated and that all depreciation will be accepted by SARS for the purposes of wear and tear allowances. No taxable profit or loss will be made on the disposal of parts. • The project will occupy space in the current factory at no additional cost. The company will need to rent a storage warehouse at R5 000 per month due to the additional products. • Interest represents the interest on the loans that will be used to fund the project. • The company's effective tax rate is 28%. Management believes that an appropriate discount rate for this product line is 14%. REQUIRED 3.1 Calculate the net present value (NPV) and internal rate of return (IRR) of the project Edu-fun. (33 marks) You are the financial manager of Toy Store Ltd. The company is planning to introduce a new range of educational toys called the Edu-Fun. The production of the new range will be at the company's factory in Johannesburg. Management has made projections for the project for its three year lifespan. All income and expenses are cash flows unless it is clearly shown otherwise. Forecasted performance per year Cash sales Cost of Sales Gross profit Interest paid Depreciation Other costs 2020 R'000 3 000 (1 000) 2 000 (250) (200) (600) Net profit In addition, there is the following information: 950 2021 R'000 7 000 (3 000) 4 000 (300) (200) (600) 2 900 2022 R'000 8 000 (3 000) 5 000 (350) (300) (600) 3 750 • The advertising campaign for the new range has not been taken into account in the projections set out above. A big advertising campaign costing R2 million is planned for the start of the project as part of the initial cost and another campaign costing R1 million is planned for the end of year two (2021). In addition, a budget of R500 000 per annum for the three years has been put aside for day-to-day advertising. Other costs that have not been taken into account is R300 000 which relates to a portion of the factory manager's salary that will be allocated to this product line. To engage in this project, the company will need to purchase a new machine costing R500 000. In addition, significant replacement of parts of the new machine is expected at the end of the second year that will cost R200 000. In the year of 2021, the machine will be disposed of for a market value of R250 000. • You can accept that depreciation has been correctly calculated and that all depreciation will be accepted by SARS for the purposes of wear and tear allowances. No taxable profit or loss will be made on the disposal of parts. • The project will occupy space in the current factory at no additional cost. The company will need to rent a storage warehouse at R5 000 per month due to the additional products. • Interest represents the interest on the loans that will be used to fund the project. • The company's effective tax rate is 28%. Management believes that an appropriate discount rate for this product line is 14%. REQUIRED 3.1 Calculate the net present value (NPV) and internal rate of return (IRR) of the project Edu-fun. (33 marks)

Answer rating: 100% (QA)

To calculate the net present value NPV and internal rate of return IRR of the EduFun project we need to first gather all relevant cash flows including ... View the full answer