S998AMMT.8
8.You work for Mattel and you are negotiating with Lucasfilm for the rights to manufacture and sell Star Wars toys. Your marketing department estimates that you can sell $500 million worth of Star Wars toys per year for 3 years, starting next year. They base this estimate on marketing research costing $5 million. These toys will cost you $250 million per year to manufacture (this includes salaries of new managers and employees). Production will require you to immediately increase your working capital from $50 million to $65 million. Working capital will decrease to $50 million again at the end of the third year. You will have to buy new equipment worth $100 million. This equipment will have a useful life of 5 years and will be depreciated to zero using straight-line depreciation over 5 years. You plan to sell the equipment at the end of the third year for $50 million. Mattel’s total current overhead is $20 million per year. If decide to do the project, you will spend $10 million immediately on an advertising campaign. Lucasfilm wants you to pay $250 million (now) for the rights. Your tax rate is 40%. If your cost of capital for this project is 10%, should you accept the offer? (20)