The Indica Company Indica originally established in 1962 to maketoys is now a leading producer of curios and toys. In 1990 thecompany introduced ‘high flite’ its first line of high-performanceballs. The Indica management has sought opportunities in whateverbusinesses seem to have some potential for cashflow. In 1999Mahesh, VP of the Indica identified another segment of the sportsball market that looked promising but highly competitive and servedby larger manufacturers. The market was for brightly coloredradiant balls and he believed a large number of young people valuedappearance and style above performance. He also believed that itwould be difficult for competitors to take advantage of theopportunity because of Indica’s cost advantages and ability to useits highly developed marketing skills. As a result in late 1999Indica decided to evaluate the marketing potential of the radiantcolored balls. Indica engaged a leading consulting firm to assessthe market for the balls. The report of the consulting firmrevealed that the market for the brightly colored balls was verygood, less competitive and supported the conclusion that theproduct could achieve a 10 to 15 percent share of the toys market.The cost incurred by Indica towards the consulting fee and otherrelated expenses were Rs. 150,000. Further the consultantsindicated that due to this launch Indica’s current sales will behit by around 10% amounting to Rs 50,000 on a cashflow basis. TheIndica is now considering investing in a machine to produce brightcolored balls. The balls will be produced in a building owned bythe firm. The building is currently vacant and housing the projectsaves it Rs 10,000 monthly rent. The original purchase price of theproperty less depreciation is zero. Working with his staff, Maheshis preparing an analysis of the proposed new product. He summarizeshis assumptions in the following table: Cost of Machinery andequipment Rs. 1000,000 Life of the project 5 Estimated market valueof the machinery Rs. 150,000 Expected sales (no.s) during the lifeof the project Year 1 7000 Year 2 10000 Year 3 14000 Year 4 12000Year 5 8000 The price of the ball in the first year will be Rs. 102each. The market is competitive so Mahesh believes that the pricewill increase at only 5% per year. Conversely the raw materialsused to produce the colored ball are rapidly growing at 10% peryear. Production cost in the first year will be Rs. 50. Themanagement of Indica believes that the investment in the differentitems of working capital will be Rs. 15,000 and the company is inthe 35% tax bracket. Is this project worthwhile at 20% requiredrate of return?