ACME Global is a technology company that specializes in producing Accounting Software. Management is in the process of creating a new software called the 'No Limit' that identifies issues in accounting records and resolves them immediately. Management believes that they may be given the opportunity to win a coveted noble prize with their newly developed software. They are also aware of the competition and that they will need to have a significant market penetration capability to make the initiative a success. A market research was conducted two months ago at a cost of $3,000,000. It revealed that customers are excited about the software and cannot wait for its availability. ACME Global is a well-known brand across the world and its products are usually sold frequently. Management is convinced that its strong brand recognition will allow many new customers to gravitate to their new line of accounting software. Although the market survey did not provide the statistics on the number of sales, management is anticipating a great revenue stream. To create the new software, there is a need to reduce the output of the previous software by 6% because of scarce resources and limited production capacity. Annual production of the product was 300,000 units at a unit selling price of $80,000 and unit variable cost of $56,000. Fixed production cost will not be affected by the reduction in output. The project would require $850 million now to purchase and install the device needed to create the software, which will have an economic life of five (5) years. Working capital of $240 million would also be required at the start of the project which is expected to be recovered at the end of the project. It is estimated that the marketplace exists for 450,000 software packages per annum. Management believes that it can retain 20% of the market share within the first three years and 15% for the last two years. Each package of the 'No Limit' Accounting Software will be sold on the market for $95,000 and will cost $45,000 to produce. The average price on the market for a similar software is $65,000, but they believe that the brand loyalty the company enjoys, and product differentiation will justify the higher price of the 'No Limit' software. 

Other relevant information associated with the venture are as follows:

Variable distribution cost of $6,000 per package.

Annual Promotion cost of 4% of sales revenue.

The cost of the software making device is to be depreciated over the life of the device on the straight-line basis with a scrap value of $5,500,000.

The required rate of return on debt is 20% and return on equity is 14%.

Currently the assets of the company are funded by 50% debt and 50% equity.

The corporation tax rate is 35%.

*** Depreciation is an allowable deduction for tax purposes.

REQUIRED - CALCULATE

(a) The annual operating income after tax and the operating cash flows of the project and the net present value (NPV).

(b) Internal Rate of Return and Profitability index of the project.

(c) A Recommendation to the management team to accept or reject the project.

(d) A report on other factors that they should consider when implementing this project?

Answer rating: 100% (QA)

a To calculate the annual operating income after tax and the operating cash flows of the project we need to consider the revenue costs and taxes assoc... View the full answer