# Financial and Managerial Accounting: P26.1A Toying With Nature wants to take advantage

Financial and Managerial AccountingProblems 26.1A Capital Budgeting and Determination of Annual Net Cash Flows

Toying With Nature wants to take advantage of children's current fascination with dinosaurs by adding several scale-model dinosaurs to its existing product line. Annual sales of the dinosaurs are estimated at 80,000 units at a price of $6 per unit. Variable manufacturing costs are estimated at $2.50 per unit, incremental fixed manufacturing costs (excluding depreciation) at $45,000 annually, and additional selling and general expenses related to the dinosaurs at $55,000 annually.

To manufacture the dinosaurs, the company must invest $350,000 in design molds and special equipment. Since toy fads wane in popularity rather quickly, Toying With Nature anticipates the special equipment will have a three-year service life with only a $20,000 salvage value. Depreciation will be computed on a straight-line basis. All revenue and expenses other than depreciation will be received or paid in cash. The company's combined federal and state income tax rate is 40 percent.

Instructions

a. Prepare a schedule showing the estimated increase in annual net income from the planned manufacture and sale of dinosaur toys. (Input all amounts as positive values. Omit the "$" sign in your response.)

b. Compute the annual net cash flows expected from this project. (Omit the $ sign in your response.)

c. Compute the following. Assume discounted at an annual rate of 15 percent. Use Exhibit 26-3 and 26-4 where necessary. (Round your PV factors to 3 decimal places, playback period to the nearest tenth of a year and the return on average investment to the nearest tenth of a percent. Omit the $ signs in your response.)

Toying With Nature wants to take advantage of children's current fascination with dinosaurs by adding several scale-model dinosaurs to its existing product line. Annual sales of the dinosaurs are estimated at 80,000 units at a price of $6 per unit. Variable manufacturing costs are estimated at $2.50 per unit, incremental fixed manufacturing costs (excluding depreciation) at $45,000 annually, and additional selling and general expenses related to the dinosaurs at $55,000 annually.

To manufacture the dinosaurs, the company must invest $350,000 in design molds and special equipment. Since toy fads wane in popularity rather quickly, Toying With Nature anticipates the special equipment will have a three-year service life with only a $20,000 salvage value. Depreciation will be computed on a straight-line basis. All revenue and expenses other than depreciation will be received or paid in cash. The company's combined federal and state income tax rate is 40 percent.

Instructions

a. Prepare a schedule showing the estimated increase in annual net income from the planned manufacture and sale of dinosaur toys. (Input all amounts as positive values. Omit the "$" sign in your response.)

b. Compute the annual net cash flows expected from this project. (Omit the $ sign in your response.)

c. Compute the following. Assume discounted at an annual rate of 15 percent. Use Exhibit 26-3 and 26-4 where necessary. (Round your PV factors to 3 decimal places, playback period to the nearest tenth of a year and the return on average investment to the nearest tenth of a percent. Omit the $ signs in your response.)

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