This question has been answered before on Chegg but it was a

This question has been answered before on Chegg but it was answered incomplete/incorrect.

You can use excel ; please show your steps for all parts.

CASE 2: Child Phy Company (Total 75 marks) The Child Phy Company was considering the advisability of adding a new product to its line. David Ben was in charge of new product development Since the founding of the company in 1995, he had seen sales grow from $150,000 a year to almost $40 M in 2015 Although the firm had initially started out manufacturing toy trucks, it had diversified into such items as wall posters, child puzzles, stuffed animals, miniature trains, and board games. In 2009, it developed the third most popular board game for the year, based on a popular television quiz show, but the show was canceled two years later. Nevertheless, the firm learned its lesson well and continued to produce board games related not only to quiz shows but to situation comedies and even a popular detective series However, by January of 2016, the need to generate new products was becoming evident. As can be seen in Figure 1, sales and net income were beginning to level off after the previously cited phenomenal growth. After doing a market analysis of possible products, Mr. Ben decided that the baseball card market was a good area for potential new sales. Baseball cards were a popular product not only among youngsters but also among adults who were trying to recapture the experience of their youth A market survey by David Ben indicated that the Topps CW Company was the largest competitor in the industry. The company actually had a public distribution of its common stock in 2001. Other major sellers in 2016 were Upper Deck, Fleer, Leaf, and Donruss. All produce millions of baseball cards on an annual basis. The cards can be purchased in packs of 15-20 cards for $3.00-$8.00 at drug or convenience stores1 or in boxes of 700- 800 cards for $40 and up. These larger quantities of cards were usually purchased fronm sport card specialty stores or at baseball card conventions (over 1,000 such conventions throughout the country took place a year) 1 Some packs are more expensive than others due to quality and buyer preference

Solution

Child Phy Co. $ 1 Normal projection of first year sales 2000000 The most suitable discount rate is 14% using a coefficient of variation of 41 -60 the median value 2 Expected cash flows of the project per period Year 0 2016 2017 2018 2019 2020 2021 Investment -2800000 Sales 0.3 600000 720000 864000 1036800 1140480 1254528 (assigning a probability of 0.3 for first year\'s projection) Operating expenses (70% of sales) 420000 504000 604800 725760 798336 878170 Earnings before depreciation and taxes 180000 216000 259200 311040 342144 376358 Tax @29% 52200 62640 75168 90202 99222 109144 Earnings after tax 127800 153360 184032 220838 242922 267214 Cash flow -2800000 127800 153360 184032 220838 242922 267214 3 NPV Feasibility of project based on NPV analysis ($1,813,169.53) The NPV of the project is negative at a discount rate of 14% 4 Feasibility of project based on IRR analysis -18% The IRR is negative. This means that the returns from the investment are too low. 5 There is a drawback of using a 6-year time horizon. The project is not long enough to generate enough cash flow for the investment. 6 Suggest another method for this capital budgeting problem. The equipment costing $2.8 million has a useful life of 5 years. It does not generate enough cash. David Ben should look for equipment that costs less and has a longer useful life.