Reference no: EM132031101

Question: Peachtree Corporation research and development (R&D) department has developed a proposal for a new toy. Based on the data below, do you recommend adoption of the proposal? Why or why not? 1. Initial capital expenditures: $50,000,000. 2. Depreciation: straight-line over 4 years 3. Sales: $13,750,000 in year 1, 23,500,000 in year 2, 40,250,000 in year 3, 44,750,000 in year 4. 4. Cost of goods sold (not counting depreciation): 65% of sales. 5. Selling, general, and administrative expenses: $1,500,000 in year 1, $1,750,000 in year 2, $2,000,000 in year 3, and $2,200,000 in year 4. 6. R&D: $1,500,000 spent one year ago. 7. Initial investment in net working capital: $1,250,000. Then it increases by an additional $1,000,000 for each of four years. 8. The firm currently owns unused equipment that will be used if the project is adopted, and sold for $25,000 if not. 9. After Year 4 the firm expects net cash flows to grow continuously at the expected rate of inflation of 2%. 10. Tax rate: 39%. 11. Cost of Capital: 14%.