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Pyxar studios is looking to produce a new movie Toy Store. Unfortunately, the movie will not be featured in theaters due to COVID restrictions, but producers expect to sell 6 million copies of the movie at $3.15 per copy over the next 5 years. After 5 years, Pyxar will not sell any more copies of Toy Store.

In order to produce the movie Pyxar has to invest $14.5 million in production equipment, which is classified as a 7-year property class under MACRS. After 5 years, Pyxar expects to sell the production equipment to independent film producers for $3.75 million.

In addition to its $14.5 million investment in production equipment, Pyxar will have fixed costs amounting to $9 million for each of the first three years of the project and $7.5 million for each of the last two years. Variable costs will amount to 20% of sales per year. Lastly, Pyxar will have to invest $2.25 million in NWC at the beginning of the project. Starting in year 1, it will maintain a NWC of $2.5 million per year over the life of the project.

Pyxar has a 34% tax rate.

1. Build a depreciation schedule for Pyxars production equipment.

1. Calculate depreciation and book value for every year.
2. Calculate after-tax cash flow from the sale of Pyxars production equipment at the end of the projects life (after 5 years).

2. Build a Proforma Income Statement for the project for the next five years. Make sure to include and correctly calculate the information that you will need to calculate project operating cash flow (OCF) in the next question.

3. Calculate total project cash flow over the next five years (you will have to calculate project OCF, project NCS and project change in NWC for each year first).

4. Use the project cash flows you calculated to evaluate the project using NPV and IRR for an 18% cost of capital. Determine whether or not Pyxar should invest in Toy Store.

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