Reference no: EM132419065

In anticipation of the year 2016 Chess World Cup, TingTing Inc. is considering getting into the souvenir business. One idea under consideration is the production of Magnus Carlsen statuettes. A machine costing $60,000 will have to be purchased and this new machine will have a life of three years (for both actual and tax purposes) and after three years the machine will have zero salvage value. In terms of depreciation, the machine will be depreciated on a straight-line basis. TingTing Inc. believes it can sell 5,000 souvenir statues per year at a price of $15 each. For each statue, the variable costs are $3 and fixed expenses (this does not include depreciation) will be $4,000 per year.

An initial outlay for net working capital of $10,000 (in year 1) and an additional $1,000 per year is required in net working capital. The working capital is expected to be recovered at the end of 3 years.

The cost of capital for TingTing Inc. is 14% and the tax rate is 35%. The figures given above assume that there will be no inflation.