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FIN 3003: Business Finance

Fall 2015
Due: December 7th at 10:00 pm
You are employed as a financial analyst at Hasbro (Ticker: HAS). Your division is seeking funding for a new
manufacturing facility to build action figures based on a series of films with a major movie studio. The deal is
contingent on approval from both sides. Your duty is to examine the financial aspects of the deal and make a
recommendation based on your findings. The studio has guaranteed that the movie franchise will have production
releases for the next seven years with very little risk that the franchise will be cut short. In the event of an early
termination of the franchise, the studio will compensate Hasbro. If the project produces a viable revenue stream, the
facility will be kept in service and the strategic partnership will be extended for a longer period of time.
The company wants to begin production of the facility in the spring of 2016 with production and revenue generation
beginning in the first quarter of 2017 to coincide with the release of the movie franchise. The project has a projected life
of six years. (If the project is accepted, it will surely have a longer useful life, but management wants to be conservative
in its analysis. In other words, if the project does not pay off by the beginning of the seventh year of operations they
dont want to do it.) FASB rules indicate the project investment should be depreciated using a 10-year useful life with
the MACRS depreciation schedule (see Table A-1 https://www.irs.gov/pub/irs-pdf/p946.pdf). Hasbro and the movie
studio have spent $145 million in market research and research and development for the project over the last three years.
The project requires an increase of $131 million in working capital. An initial investment of $372 million in production
facilities is required to undertake the project. When the project is completed in six years, the company can reclaim $78
million from the repurposing and reallocation of the facilities. (Note: The reclamation value is below the accounting value
of the facility, so no taxes will be assessed on the revenue from the reclamation.)
The forecasts for the project state that the expected retail price of the action figures will be $7.00 with an expected
increase of 3.5 percent per year over the subsequent five years. Sales projections suggest that 40 million figures should
be sold in the initial year with increases of 3 percent in 2018, 2020, and 2022. Sales forecasts (when considering the
release of multiple movies to support the sales of figures due to new character introductions, costume changes, etc.)
for 2019 and 2021 are expected to increase sales by 15 percent.
The variable costs charged to the project are expected to be 41 percent of the revenue generated annually. The fixed
costs attributed to the project are $79 million and will increase by 3.8 percent over the life of the project. The working
capital requirements of the project are such that the firm will need to increase working capital by 7.1 percent per year for
the project. Due to the treaties and agreements in place concerning global manufacturing, Hasbro is subject to a tax
rates of 26 percent. The action figure lines success is tied to the effectiveness of the movie from which the figures are
based. Because of the uncertainty related to the market acceptance of the product line and the success of the studios
series of films, additional risk above Hasbros current cost of capital exists. Mitigating the risk of the project is Hasbros
expertise with taking similar projects to market; management suggests that a risk adjustment in excess of cost of capital
of 3.5 percent is necessary.
Your job is to prepare an analysis of the project and prepare a brief report explaining whether the firm ought to
undertake the project. You should consider various evaluation techniques such as NPV, IRR, and profitability index for
the analysis. Include in your report any assumptions and sources that you use for discussion and data. Stock and
financial data for the firm can be found at Yahoo! Finance1, data to determine the market risk premium is available in an
academic working paper by Fernandez, Ortiz Pizarro and Fernndez Acn 2, treasury rates can be found from the U.S.
Treasury3, and bond data is available from the Financial Industry Regulatory Authority 4.
You will need to submit a copy of a memorandum and an excel spreadsheet model detailing your cash flows. The
memorandum should be no more than 2 pages single spaced. You may include additional materials in an appendix
(referred to in the memorandum) and any appendices will need to be submitted separately from the memorandum. For
Fernandez, Pablo and Ortiz Pizarro, Alberto and Fernndez Acn, Isabel, Discount Rate (Risk-Free Rate and Market Risk Premium) Used for 41
Countries in 2015: A Survey (April 23, 2015). Available at SSRN: http://ssrn.com/abstract=2598104 or http://dx.doi.org/10.2139/ssrn.2598104
3 http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
4 http://finra-markets.morningstar.com/BondCenter/Default.jsp

a good example of how to write a memorandum, see the Purdue Online Writing Lab 5. Additionally, Microsoft Word has
a template that you can use for your memorandum.
Note on your submission with regards to academic misconduct
You are to work on the project without the help of your peers. The project is NOT a group project. If you need
guidance on the project, consult with the instructor of the course. The project is similar to projects assigned in previous
semesters and you may possess a copy of previous submissions. The project is not identical to existing projects. You
may be tempted to complete the project at the last moment and use someones previous submission to complete your
project. Using a copy of someones previous submission as a template for your project is expressly prohibited and will
result in you receiving NO CREDIT for the project.