QUESTION #6 (30 points, 5 points each) A cutting-edge technology company is considering building a new App to deploy at the Apple App Store. The App is relatively complex and will take about 2 years to set up and test before it is fully functional. Then it will be sold at the App Store over the subsequent 6 years. The planning horizon is 8 years: 2 years for setup and 6 years for operation. The original cost to build the app $800,000. At the end of the 8 years its estimated value will be $50,000 due to obsolescence. The firm's time value of money is 12% 12% For all parts of this question: Draw a cash flow diagram and form an equation that accurately describes the given problem and determine the parameters in your equation explicitly (4 points). Compute the result (1 point). Show all steps in your work clearly. a. Maintenance and hosting costs (not required during setup period) are, $150,000 per year will be paid at the end of each year to a third party company. Determine the present worth of these costs (only the maintenance costs). 50.000 P-ACP]A, %,n) p = 150,000 (PLA, 12%, (EIP , 12%,3) b. Insurance costs are payable at the start of each year over the 8-year planning horizon. The cost will be $9,000 the first year, then increasing by $2,000 in each of the subsequent 7 years. Determine the PV of these cests 110c0 1500 1517000 Yaf the cente by $2,000 in 9000 - o 2.3 y 5 71 rectane triangle PV=19000 (PIA, 12% ) + 2000 (PIG, 12%,) ) FIP = 9000 (4 11141) + 2000 (11.66427) - 150291-23 x C. Renewal of third-party software licenses will occur at the start of each 3-month period, beginning at the start of the third year and ending at the midpoint of the seventh year. Each payment for software licenses will be $25,000. Determine the PW of these costs. year. Each the start of the third will occur at the start of 25,00 25,000 0 2 3 4 5 6 718 PV = P(PIF, :,n) + P(PIF, :,^) X 725000 (PIF, & 127,4.5) 2550,000 P/F, 12%,2) = 109565X d. Labor costs will start at $200,000, increasing at the rate of 5% (five percent) every quarter over the 8-year planning horizon. That is, labor costs will be $200,000 for the first quarter, $210,000 for the second, 220.500 for the third and so on. Assuming that these payments take place at the beginning of each quarter, determine the PW of the costs. For clarification, assume that labor costs start at the beginning of the project. 20,000 111111s o PV = 20,000 (PIA, 12%,32) + 5% (elG, 12%,5% 3 e. Determine the total PW of all costs for this project. PW - add all. f. If you were to obtain bank financing for the PW from (e) above, what monthly payments would you need to repay it? Assume an annual interest rate of 4% compounded monthly and a 60-month term. = 4% (compounded monthly) n = 60 A = 7 QUESTION #6 (30 points, 5 points each) A cutting-edge technology company is considering building a new App to deploy at the Apple App Store. The App is relatively complex and will take about 2 years to set up and test before it is fully functional. Then it will be sold at the App Store over the subsequent 6 years. The planning horizon is 8 years: 2 years for setup and 6 years for operation. The original cost to build the app $800,000. At the end of the 8 years its estimated value will be $50,000 due to obsolescence. The firm's time value of money is 12% 12% For all parts of this question: Draw a cash flow diagram and form an equation that accurately describes the given problem and determine the parameters in your equation explicitly (4 points). Compute the result (1 point). Show all steps in your work clearly. a. Maintenance and hosting costs (not required during setup period) are, $150,000 per year will be paid at the end of each year to a third party company. Determine the present worth of these costs (only the maintenance costs). 50.000 P-ACP]A, %,n) p = 150,000 (PLA, 12%, (EIP , 12%,3) b. Insurance costs are payable at the start of each year over the 8-year planning horizon. The cost will be $9,000 the first year, then increasing by $2,000 in each of the subsequent 7 years. Determine the PV of these cests 110c0 1500 1517000 Yaf the cente by $2,000 in 9000 - o 2.3 y 5 71 rectane triangle PV=19000 (PIA, 12% ) + 2000 (PIG, 12%,) ) FIP = 9000 (4 11141) + 2000 (11.66427) - 150291-23 x C. Renewal of third-party software licenses will occur at the start of each 3-month period, beginning at the start of the third year and ending at the midpoint of the seventh year. Each payment for software licenses will be $25,000. Determine the PW of these costs. year. Each the start of the third will occur at the start of 25,00 25,000 0 2 3 4 5 6 718 PV = P(PIF, :,n) + P(PIF, :,^) X 725000 (PIF, & 127,4.5) 2550,000 P/F, 12%,2) = 109565X d. Labor costs will start at $200,000, increasing at the rate of 5% (five percent) every quarter over the 8-year planning horizon. That is, labor costs will be $200,000 for the first quarter, $210,000 for the second, 220.500 for the third and so on. Assuming that these payments take place at the beginning of each quarter, determine the PW of the costs. For clarification, assume that labor costs start at the beginning of the project. 20,000 111111s o PV = 20,000 (PIA, 12%,32) + 5% (elG, 12%,5% 3 e. Determine the total PW of all costs for this project. PW - add all. f. If you were to obtain bank financing for the PW from (e) above, what monthly payments would you need to repay it? Assume an annual interest rate of 4% compounded monthly and a 60-month term. = 4% (compounded monthly) n = 60 A = 7
