Take Five Systems, a new start up, is developing a new iPhone application (app) and provides you with the following assumptions Development and testing of the new app will take four months Month five is the first month of revenue generation Initial monthly app sales of 5,000 downloads at a price of $2 99 Unit sales will grow at 15 per month for months six through twelve and then will be flat thereafter The app will become obsolete and will need to be revised replaced after month 18 A new software start up, Lutoj, Inc , is developing a new smart home software product Lutoj believes revenue must reach $5 million in Year 3 for the product to be viable Lutojs operating margin (EBIT Sales) is 20 , the tax rate is 30 , and asset turnover is 5X The founders have $200,000 between them for initial equity funding Assume Lutoj will pay no dividend With no other financing, will the $200,000 of founder investment be sufficient to achieve the Year 3 sales target If not, what level of initial equity investment would be required Assume Lutoj cannot raise additional equity, but will use debt to achieve the scale necessary to reach the Year 3 sales target They can borrow at an 8 interest rate before tax How much debt will initially be required

The Answer is in the image, click to view ...

Question: Take Five Systems, a new start-up, is developing a new iPhone application (app) and provides you with the following assumptions: Development and testing of the

Take Five Systems, a new start-up, is developing a new iPhone application (app) and provides you with the following assumptions:
1. Development and testing of the new app will take four months. Month five is the first month of revenue generation.
2. Initial monthly app sales of 5,000 downloads at a price of $2.99
3. Unit sales will grow at 15% per month for months six through twelve and then will be flat thereafter
4. The app will become obsolete and will need to be revised/replaced after month 18

A new software start-up, Lutoj, Inc., is developing a new smart home software product. Lutoj believes revenue must reach $5 million in Year 3 for the product to be viable. Lutojs operating margin (EBIT/Sales) is 20%, the tax rate is 30%, and asset turnover is 5X. The founders have $200,000 between them for initial equity funding. Assume Lutoj will pay no dividend.
1. With no other financing, will the $200,000 of founder investment be sufficient to achieve the Year 3 sales target? If not, what level of initial equity investment would be required?
2. Assume Lutoj cannot raise additional equity, but will use debt to achieve the scale necessary to reach the Year 3 sales target. They can borrow at an 8% interest rate before tax. How much debt will initially be required?