Waldo Entertainment Products, Inc. is negotiating with Disney for the rights to manufacture and sell superhero-themed toys for a three-year period. At the end of year 3, Waldo plans to liquidate the assets from the project. In addition to the facts and assumptions below, assume that working capital must be invested immediately in year 0) and will be fully recovered at the end of year 3, and that no incremental overhead expense will be incurred from the project. Note that the difference between the selling price of the equipment at the end of year 3 and the equipment's book value at the time of the sale is a taxable gain. Identify the relevant cash flows, then calculate the investment's net present value, benefit-cost ratio, and internal rate of return. 20,000 250,000 3 Facts and assumptions ($ thousands) Marketing research costs, to date Initial cost of new equipment Expected life of equipment (years) Salvage value Depreciation method Selling price of new equipment at the end of year 3 Incremental annual sales (years 1 through 3) Incremental annual production costs Incremental annual selling and administrative expenses Current annual overhead costs Straight-line 125,000 350,000 160,000 40,000 200,000 30% Tax rate Working capital required (percent of sales) 15% The beta factor of this new investment is 1.5. The company has a target capital structure of 50% equity and 50% debt. The cost of debt after-tax is 8%. The risk-free rate is 4% and the market risk is 8%. Required: 1. Identify the relevant cash flows, then calculate the investment's net present value, benefit-cost ratio, and internal rate of return. 2. Does inflation make this investment more attractive or less attractive? Why? 15 Marks