HOVID PLC, a software company, has developed a new game, 'Vista', which it plans to launch in the near future. Sales of the new game are expected to be very strong, following a favourable review by a popular PC magazine. HOVID PLC has been informed that the review will give the game a 'Best Buy' recommendation. Sales volumes, production volumes and selling prices for 'Vista' over its four-year life are expected to be as follows: Year 1 2 3 4 Sales and production (games) 100,000 180,000 160,000 80,000 Selling price (RM per game) RM25 RM24 RM23 RM22 Financial information on 'Vista' cost of production is as follows: Direct material cost RM6.40 per game Other variable production cost RM7.50 per game Fixed costs RM600,000 per year Advertising costs to stimulate demand are expected to be RM350,000 in the first year of production and RM100,000 in the second year of production. No advertising costs are expected in the third and fourth years of production. 'Vista' will be produced on a new production machine costing RM800,000. It will cost RM80,000 to modify it for special use by the firm and an additional RM20,000 to install the machine. Government legislation allows HOVID PLC to

Required:

a. Calculatethe net presentvalue of theproposed investment andcomment on your findings.

b. Operatingcash flows ratherthan operating profit formed the basis for capital budgeting decisions.

Brieflyexplain THREE (3) types of costs that need to be considered in determining

incremental cash flows.

Answer rating: 100% (QA)

a To calculate the net present value NPV of the proposed investment we need to discount all the cash flows associated with the project to their present value and then subtract the initial investment c... View the full answer