You are managing a small software firm producing games for mobile devices and are considering introducing a new adventure game to customers. You plan to sell the game 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 revenues with the cost of goods sold of $2,850,000. The revenues and the costs 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 new 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. You will have to hire additional sales professionals to market the new product during the project, and their combined annual salary will be $250,000. 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 company’s tax rate is 35%.

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(1) (2) (3) (4) (5) (6) (7) (8) (11) (12) Project Length: (13) Corporate Tax Rate (%): (14) Discount Rate (%): Incremental Annual Revenues ($): (9) Annual Selling, General & Admin expenses ($): Incremental Annual Cost of goods sold ($): (10) Annual Depreciation ($) using 3-year Straight-line method: 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 ($): Annual Side effect ($): Changes in Net Working Capital in Year 0: Changes in Net Working Capital in Year 2: Changes in Net Working Capital in Year 3: (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (26) (26) (27) Incremental Revenues ($) Cost of goods sold ($) Sales expenses (SG&A, $) Annual Depreciation ($) Annual Side effect ($) Taxable Income ($) Corporate Tax rate (%) Corporate tax ($) Incremental Net Income Annual Depreciation Capital Expenditures Changes in NWC Annual Free Cash Flows ($) YEAR O VALUES YEAR 1 YEAR 2 YEAR 3 (1) (2) (3) (4) (5) (6) (7) (8) (11) (12) Project Length: (13) Corporate Tax Rate (%): (14) Discount Rate (%): Incremental Annual Revenues ($): (9) Annual Selling, General & Admin expenses ($): Incremental Annual Cost of goods sold ($): (10) Annual Depreciation ($) using 3-year Straight-line method: 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 ($): Annual Side effect ($): Changes in Net Working Capital in Year 0: Changes in Net Working Capital in Year 2: Changes in Net Working Capital in Year 3: (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (26) (26) (27) Incremental Revenues ($) Cost of goods sold ($) Sales expenses (SG&A, $) Annual Depreciation ($) Annual Side effect ($) Taxable Income ($) Corporate Tax rate (%) Corporate tax ($) Incremental Net Income Annual Depreciation Capital Expenditures Changes in NWC Annual Free Cash Flows ($) YEAR O VALUES YEAR 1 YEAR 2 YEAR 3

Answer rating: 100% (QA)

Solution Computation of Net Present Value Net present value Present value of cash inflows Present va... View the full answer