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Waldo Entertainment Products, Inc. is negotiating with Disney for the rights to manufacture and sell superhero-themed toys for a three-year period. At the end of year 3, Waldo plans to liquidate the assets from the project. In addition to the facts and assumptions below, assume that working capital must be invested immediately (in year 0) and will be fully recovered at the end of year 3, and that no incremental overhead expense will be incurred from the project. Note that the difference between the selling price of the equipment at the end of year 3 and the equipment's book value at the time of the sale is a taxable gain. Identify the relevant cash flows, then calculate the investments net present value, benefit-cost ratio, and internal rate of return.

Facts and assumptions ($ thousands)
Marketing research costs, to date	20,000
Initial cost of new equipment	250,000
Expected life of equipment (years)	5
Salvage value	0
Depreciation method	Straight-line
Selling price of new equipment at the end of year 3	125,000
Incremental annual sales (years 1 through 3)	350,000
Incremental annual production costs	160,000
Incremental annual selling and administrative expenses	40,000
Current annual overhead costs	200,000
Tax rate	30%
Working capital required (percent of sales)	15%

The beta factor of this new investment is 1.5. The company has a target capital structure of 50% equity and 50% debt. The cost of debt after-tax is 8%. The risk-free rate is 4% and the market risk is 8%.

Required:

1. Identify the relevant cash flows, then calculate the investments net present value, benefit-cost ratio, and internal rate of return.

2. Does inflation make this investment more attractive or less attractive? Why?