4. Nintendo Co., Ltd. has spent $300,000 on research and development of a new video game...

 

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4. Nintendo Co., Ltd. has spent $300,000 on research and development of a new video game console. The new console is now ready for production and sale. The expected sales will be 15,000 units per year for the next 5 years (starting at t=1). The selling price will be $80 per unit and the variable costs are estimated to be $30. Additional fixed costs will be $100,000 per year. Net working capital requirement at the beginning of each year is estimated to be 5% of expected sales. That is, the level of net working capital investment today (t=0) is equal to 5% of expected year 1 sales, the level of net working capital investment a year from today (t=1) is equal to 5% of expected year 2 sales and so on. The net working capital falls to $0 by the project's end (t=5). In order to produce the console, an equipment costing $500,000 will have to be purchased today. Nintendo plans to borrow this amount at 6% interest per year and fully repay the loan at the end of year 5. The CCA rate of the equipment is 30% and will be sold for $80,000 when Nintendo stops production in 5 years. Assume there is no other asset in the asset class, tax rate is 25%, and the cost of capital is 8%. Calculate the net present value of this project using the tax shield approach. 4. Nintendo Co., Ltd. has spent $300,000 on research and development of a new video game console. The new console is now ready for production and sale. The expected sales will be 15,000 units per year for the next 5 years (starting at t=1). The selling price will be $80 per unit and the variable costs are estimated to be $30. Additional fixed costs will be $100,000 per year. Net working capital requirement at the beginning of each year is estimated to be 5% of expected sales. That is, the level of net working capital investment today (t=0) is equal to 5% of expected year 1 sales, the level of net working capital investment a year from today (t=1) is equal to 5% of expected year 2 sales and so on. The net working capital falls to $0 by the project's end (t=5). In order to produce the console, an equipment costing $500,000 will have to be purchased today. Nintendo plans to borrow this amount at 6% interest per year and fully repay the loan at the end of year 5. The CCA rate of the equipment is 30% and will be sold for $80,000 when Nintendo stops production in 5 years. Assume there is no other asset in the asset class, tax rate is 25%, and the cost of capital is 8%. Calculate the net present value of this project using the tax shield approach.

Answer rating: 100% (QA)

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