423.6
6.You work for Nike and you are negotiating with Lucasfilm to get the rights to sell a shoe called "Air Skywalker". You think you should be able to sell $400 million worth of these shoes per year for 3 years, starting next year. You have spent $5 million designing and test marketing the shoes. Production of the shoes will cost $200 million per year (this includes salaries of new managers and employees). You will have to buy new production equipment worth $80 million. This equipment will have a 4-year life and will be depreciated to zero over that life. You plan to sell the equipment for $25 million at the end of the third year. Production of the new shoe will also require you to increase your working capital from $20 million to $25 million immediately. Working capital will decrease back down to $20 million at the end of the third year. Nike’s current overhead amounts to $75 million per year. Lucasfilm wants $200 million (now) in exchange for the rights to produce the shoe. Your tax rate is 40%. If the cost of capital for this project is 10%, should you take their offer? (18)