Question
Your company, Fun with Finance, has just completed a $5 million marketing survey that suggests that your new computer role-playing game: A day in prison
Your company, Fun with Finance, has just completed a $5 million marketing survey that suggests that your new computer role-playing game: "A day in prison with Mr. Madoff" is going to be a big hit. Producing the game will require an immediate $20 million capital investment in new equipment. At the same time, net working capital will have to increase from $3 million to $4 million, and remain at that level for the life of the project. The game is expected to produce revenues of $23 million per year and costs of $10 million per year for 4 years, starting one year from today. Fun with Finance has an existing overhead cost of 6 million. This project will share 5% of the existing overhead cost in income statement. This project requires hiring new managers that will cost $0.5 million per year. Your tax rate is 40%. The new equipment will be depreciated over 4 years to a book value of 0 using the straight-line method. You have contracted to sell the equipment for $2 million at the end of the fourth year, at which point production will end and net working capital will return to the original $3 million level. Assume that the correct discount rate for this project is 11%. Show the relevant cash flows for this project and compute its NPV.
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