Herro Inc. is considering the development of a new computer game. The firm is planning to spend
Question:
Herro Inc. is considering the development of a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine total $50,000. The project has a life of four years. At that time the machine is expected to be sold for $75,000. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 25 percent. The company expects net working capital to increase by $100,000 at the beginning of the project. The company has a cost of capital of 12 percent.
Required:
Use net present value to determine if Herro should buy the equipment and undertake the project.
Finance Applications and Theory
ISBN: 978-0077861681
3rd edition
Authors: Marcia Cornett, Troy Adair