It is the beginning of 1979. Atari has decided to introduce a new video game system called the Atari VCS2600. The system will sell for $140. Demand is forecast at 2.5 million units per year for four years (1979, 1980, 1981, 1982) but a particularly insightful economic analyst suggests that demand will fall by 30 percent each year in the following two years (1983 and 1984). For each system sold, 10 game cartridges will be sold at a price of $20 per cartridge. The system has a variable cost of $40 and each game cartridge has a variable cost of $4. Fixed costs are $8 million per year, including advertising spending. The equipment used to manufacture the VCS2600 has a cost of $4 million and will be depreciated on a straight-line basis over the period of six years. The taxation rate is 30 percent. The relevant discount rate is 18 percent. Calculate the NPV of the Atari VCS2600 and advise whether the project should be undertaken.

The initial cost of the project is only the costs that take place at the beginning of the projec, which appears in period 0 (minus number). In our case it's the 4 million for purchasing the machine.