You are running a small software firm producing games for mobile devices and are considering introducing a new adventure game to customers. You plan to sell the product 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 revenue with the cost of goods sold of $2,850,000. The revenue and the cost 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 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. 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 companys tax rate is 35%.

VALUES Project Length: Corporate Tax Rate (%): Discount Rate (%): Incremental Annual Revenues ($): Capital Expenditure from purchasing the new equipment in Year 0: # of years in the Equipment's Useful life: Estimated value at the end of Useful life ($): Annual Depreciation ($) using 3-year Straight-line method: Annual Side effect ($): Changes in Net Working Capital in Year 0: Changes in Net Working Capital in Year 2: Changes in Net Working Capital in Year 3: YEAR O YEAR 1 YEAR 2 YEAR 3 (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) Incremental Revenues ($) Cost of goods sold ($) Annual Depreciation (S) Annual Side effect ($) Taxable income ($) Corporate Tax rate (%) Corporate tax ($) Incremental Net Income (25) Net Capital Expenditures Changes in NWC Annual Free Cash Flows ($) NPV IRR Your recommendation: Take it, or leave it? Why so? (26) (27) (28)