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Your company has spent $250000 on research to develop a new computer game The firm is planning to spend $1400000 on a machine to produce the new game Shipping and installation costs for the new

Your company has spent $250,000 on research to develop a new computer game. The firm is planning to spend $1,400,000 on a machine to produce the new game. Shipping and installation costs for the new machine total $200,000 and these costs will be capitalized and depreciated together with the cost of the machine. The machine will be used for 3 years, has a $200,000 estimated resale value at the end of three years, and will be depreciated straight line over 4 years. Revenue from the new game is expected to be $1,200,000 per year, with costs of $500,000 per year. The firm has a tax rate of 35 percent, a cost of capital (discount rate) of 6 percent, and it expects net working capital (NWC) to increase by $150,000 at the beginning of the project. This investment in NWC will be wholly recouped at the end of the project. .

A) Complete the table below.

B) In the second table below calculate the Net Present Value (NPV) of the project.

C) Calculate the Profitability Index (PI) of the project.

D) Is the Internal Rate of Return (IRR) of the project greater than, equal to, or less than the cost of capital (discount rate)?

E) Should your company proceed with this project? Explain based on the decision criteria for NPV, PI, and IRR.  

Year

0

1

2

3

         

Revenue

       
         

Costs

       
         

Depreciation

       
         

EBIT

       
         

Taxes

       
         

Net Income

       
         

Operating Cash Flow

       
         

Change in Net Operating Working Capital

       
         

Change in Gross Fixed Assets

       
         

Total Free Cash Flow

       

Net Present Value

 

Profitability Index

 

Internal Rate of Return >, =, or < the cost of capital (discount rate)?

 

Proceed with the project? Explain.

 
 

May 20 2020 View more View Less

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