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# Questions Toy &amp; Fun Company is a toy company in Hong Kong. The company produces a variety of toys for newborn babies and children up to 10 years...

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Questions Toy & Fun Company is a toy company in Hong Kong. The company produces a variety of toys for newborn babies and children up to 10 years old. Last year, the company hired a consultant at a cost of \$2,200,000 to estimate the development of painting kits. The consultant pointed out that a new launch of painting kits would be able to stimulate sales of the company. Additional sales revenue of \$22,400,000 per year will be generated by this new product. The expenditure incurred in this new product is listed below: • If the company accepts this new product, the annual cash expenses of the company will increase from \$84,000,000 to \$86,800,000. • The company has to borrow \$40,000,000 from a bank. The bank offers the company 8% interest and additional interest expenses of \$3,200,000 each year. • Additional inventory of \$8,400,000 will be incurred for the new product. • The new machine will cost \$50,400,000, with a useful life of four years. The company applies the simplified straight-line method over the useful life period. This new machine should be installed before the new project formally starts. Assume the marginal tax rate is 18% and the required rate of return for the company is 10%. As the finance manager of the company, you are required to review this project. Review and decide whether the following items are relevant cash flows for the project or not. a i The consulting fee: \$2,200,000 ii The increase in inventory: \$8,400,000 iii Additional interest expense: \$3,200,000 per year. b Develop a capital budgeting analysis to determine whether the company should accept this project. Remember to show the calculation steps clearly in order to get full credit.

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