a You are managing a small software firm producing games for mobile devices and are considering introducing a new adventure game to customers. You plan to sell the game for the next 3 years and then exit before the competition catches up. Based on the market research done last year for $30,000, you believe that, in year 1, the project will generate $4,800,000 of revenues with the cost of goods sold of $2,850,000. The revenues and the costs will diminish by 2% each year after that. The project will immediately require new computer equipment valued at $1,800,000. This equipment will be depreciated to $0 over 3 years using the straight-line method. The net working capital will increase immediately by $400,000 from the current level, stay at the new level in year 1 and then decrease by $250,000 in year 2, and again decrease by $150,000 in year 3, returning to the current level. The introduction of the new game will affect the revenues from your other existing adventure games negatively by $190,000 per year. You will have to hire additional sales professionals to market the new product during the project, and their combined annual salary will be $250,000. Forecast all of the annual free cash flows for this project, and then compute its net present value and IRR using a discount rate of 9%. Is this project worth taking? Your company's tax rate is 35%. D H VALUES (1) Project Length: (2) Corporate Tax Rate(%): (3) Discount Rate (X) (5) (6) (7) 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 (8) Incremental Annual Revenues (S): Incremental Annual Cost of goods sold (5) Capital Expenditure from purchasing the new equipment in Year of # of years in the Equipment's Useful life: Estimated value at the end of Useful life (S): Annual Selling, General & Admin expenses ($): Annual Depreciation (5) using 3-year Straight-line method Annual Side effect (5) Changes in Net Working Capital in Year : (9) (10) (11) (12) (13) Changes in Net Working Capital in Year 2: (14) Changes in Net Working Capital in Year 3: C D G H 44 YEAR O YEAR 1 YEAR 2 YEAR 3 (15) (16) (17) (18) (19) (20) (21) Incremental Revenues (S) Cost of goods sold ($) Sales expenses (SG&A, $) Annual Depreciation ($) Annual Side effect ($) Taxable income (5) Corporate Tax rate (%) Corporate tax (5) Incremental Net Income (22) (23) (24) Annual Depreciation (26) 46 47 48 49 SO 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 Net Capital Expenditures Changes in NWC (26) (27) Annual Free Cash Flows ($) (28) NPV (29) IRR Your recommendation: Take it, or leave it? Why so
