Reference no: EM132940648

Fresnel Enterprises, Inc. is embarking on a new venture with a partner manufacturing company China. Fresnel has designed a new line of screen guards for smartphones that not only protect screens, but also act as a magnifying glass. They expect the new screen guards to be particularly popular with retirees in the United States, so are already planning a marketing campaign targeting the Florida and Arizona markets.

However, while Fresnel can manage design, marketing, and distribution in the United States, they have little manufacturing expertise. So they have hired a contract manufacturer in China to handle actual production. Fresnel will supply the initial investment dollars needed to set up the production and assembly lines in China, and then pay their partner a modest fee for each unit produced. Since they are handling distribution, there will also be some working capital investments required.

Fresnel is planning a 5-year time horizon for this project. At the end of year 5, the company will liquidate the assets from the project. All assets will have been fully depreciated. A list of facts and assumptions, including sales forecasts for the life of the project, are given below.

Design Costs, Already Incurred to Date        $150,000
Initial Cost of Equipment                            $675,000
Annual Depreciation on Equipment                $135,000
After-Tax Salvage Value of Equipment Year 5   $65,000
Annual Selling and Administrative Expenses    $95,000
Production Costs (% of Sales)                        35%
Working Capital Investment (% of Sales)      25%
Effective Tax Rate (% of Taxable Income)      21%
Required Return (%)                                12%

Sales Projections
Year One $250,000
Year Two $650,000
Year Three $850,000
Year Four $800,000
Year Five $450,000

Problem 1: Using the information provided, create simple income statements for each year of the project. Calculate the annual Operating Income (EBIT) and Net Income.