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You are considering launching an app to connect all household appliances to the mobile phone. To set up the start-up, you anticipate that you will
You are considering launching an app to connect all household appliances to the mobile phone. To set up the start-up, you anticipate that you will need to acquire computer hardware and equipment costing $100,000. (The lifetime of this hardware and equipment is 5 years for depreciation purposes and straight-line depreciation to a zero salvage value will be used). In addition, you will have to rent an office for $50,000 a year. You estimate that you will need to hire 5 software specialists at $50,000 a year each to work on the app and that your digital advertising costs and other operational costs will be $100,000 a year. You expect to price the app at $10 per unit and to sell 60,000 units in the first year The number of units sold is expected to increase 10% a year for the remaining 4 years, and prices and all costs are expected to increase at 3% a year, reflecting inflation. You will also need to maintain working capital (mostly cash to run the business) at 10% of revenues. (Assume that working capital investmentis made at the beginning of each year). Your tax rate will be 40% and the cost of capital is 12% a. estimate the after-tax operating income on this project b. estimate the cash flows each year on this project c. what is the NPV of your business? Should you proceed? 4
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