Question
THE ULTIMATE RETRO GAMING SYSTEM Initial Inputs: A technology firm is considering developing The Ultimate Retro Gaming System which will include thousands of games, highlighted
THE ULTIMATE RETRO GAMING SYSTEM
Initial Inputs: A technology firm is considering developing The Ultimate Retro Gaming System which will include thousands of games, highlighted by many of the classics from the 1970s, 1980s, and 1990s. This project under consideration costs $500,000, has a five-year life, and has no salvage value. Depreciation is straight-line to zero. The required return is 14%, and the tax rate is 21%. In addition, we have compiled the following information:
Base Case Lower Bound Upper Bound
Unit sales 40,000 35,000 45,000 Price per unit $100 $90 $110 Variable costs per unit $75 $70 $80 Fixed Costs per year $150,000 $125,000 $175,000
New Details: You now have been asked to consider some other inputs. The cost, life of the project, salvage value, straight-line depreciation, required return, and tax rate will remain the same. Now, however, you have been asked to consider the following additional possibilities: 1. Management is concerned that the sales projections may be too optimistic. What happens if all of our models are too high in terms of unit sales? What if actual sales are 25% lower than our models?
2. How would an annual increase in unit sales of 15% or an annual reduction in unit sales of 15% impact our models? (Hint: This is not a one-time change. It is an increase or decrease of 15% each year.)
3. Consider an annual decrease in price per unit in the best case, worst case, and base case of 10% per unit to an increase in price per unit of 10%. (Hint: This is not a one-time change. It is an increase or decrease of 10% each year.)
4. Consider an annual decrease in the variable costs per unit in the best case, worst case, and base case of 10% per unit to an increase in variable costs per unit of 10%. (Hint: This is not a one-time change. It is an increase or decrease of 10% each year.)
5. Consider any other potential changes to the model you may want to run. (This step is optional, but I want to allow for your own creativity.)
Write a brief report (no more than 2-3 pages) describing what you have found. There is no need to highlight every single calculation or model in your written analysis. Focus on the big picture, and highlight the key projections that support your recommendations! What is your advice to management regarding the project? What, if anything, concerns you about the possibilities outlined above? What potential opportunity do you see?
Can you help me with getting a big picture? Where are the opportunities? Can I have the questions answered from the above questions (from the bigger paragraph) and in detail as well, please? The quicker the better. Thank you.
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