Question

As a manager for Knickerbocker Toys you believe the Holly Hobbie line of dolls is poised for a comeback. Your proposed growth strategy is to offer a full-line of the dolls You can reacquire the rights to the brand for $3,000,000. You expect to make dolls for the next 4 years. New revenues associated with your growth strategy will be $3,500,000 for each year, while costs will be $2,600,000. The brand rights are to be straight line depreciated over the project,after which you plan on selling the brand rights for $750,000. The marginal corporate tax rate is 20%. Working capital will need to increase from $100,000 to $190,000 right away, fall to $160,000 in year 2 and be recovered to the original level in year 3. The net cash flow for year O is [ Select] A , for year 1 is [Select] , for year 2 is [Select ] * , for year 3 is [ Select] , and for year 4 is [Select] You may use the grid below to determine your net cash flows:

Answer 1

A B с D E F G 1 2 1 2 3 4 0 30,00,000 3 Year Brand Rights Purchased New Revenues Less: Costs Less : Depreciation Operating profit Less : Tax NOPAT Add : Depreciation Less : Increase in working capital Capital gain after tax Cash flow 35,00,000 26,00,000 7,50,000 1,50,000 30,000 1,20,000 7,50,000 35,00,000 26,00,000 7,50,000 1,50,000 30,000 1,20,000 7,50,000 -30,000 35,00,000 26,00,000 7,50,000 1,50,000 30,000 1,20,000 7,50,000 - 60,000 35,00,000 26,00,000 7,50,000 1,50,000 30,000 1,20,000 7,50,000 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 90000 6,00,000 14,70,000 -30,90,000 8,70,000 9,00,000 9,30,000 Cash flow Year 0 Year 1 Year 2 Year 3 Year 4 -30,90,000 8,70,000 9,00,000 9,30,000 14,70,000 21 22

A B с D E F G 1 1 2 3 4 2 3 4 5 6 7 Year 0 Brand Rights Purchased 30,00,000 New Revenues Less : Costs Less : Depreciation Operating profit Less : Tax NOPAT Add : Depreciation Less : Increase in working capital =190000-100000 Capital gain after tax Cash flow --C3-C11 35,00,000 35,00,000 35,00,000 35,00,000 26,00,000 26,00,000 26,00,000 26,00,000 =$C$3/4 =$C$3/4 =$C$3/4 =$C$3/4 =D4-D5-D6 =E4-E5-E6 =F4-F5-F6 =G4-G5-G6 =D7.20% =E720% =F7* 20% =G7.20% =D7-D8 =E7-E8 =F7-F8 =G7-G8 7,50,000 7,50,000 7,50,000 7,50,000 =160000 - 190000 =100000 - 160000 =750000*(1-20%) =D9+D10-D11+D12 = E9+E10-E11+E12 =F9+F10-F11+F12 =G9+G10-G11+G12 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Cash flow Year o Year 1 Year 2 Year 3 Year 4 -30,90,000 8,70,000 9,00,000 9,30,000 14,70,000