What is the profitability index

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Ben E-Babies wants to develop a new line of electronic toys for babies who like to play on their parents’ cell phones. The electronic toys are expected to generate sales of $450,000 in year 1 and $850,000 each year in years 2, 3, 4 and 5. The cost of the toys is 23% of sales. Selling, general and administrative expenses are 20% of sales. Ben E-Babies has already spent $2,000,000 on research and development for this product line. The new project requires investment in new equipment of $450,000 up front which can depreciated straight line over 5 years at which point it is worthless. Net working capital of $650,000 is required at the beginning of the project and this can be fully recovered at the end of year 5 when the project is shut down. The tax rate is 30%. If the correct discount rate to use is 12%, what is the NPV of the new toy line? What is the IRR? What is the Profitability Index?

Reference no: EM131451343

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