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Q: Intro Finance Assignment Due by midnight on march 27th, 2005 ( Answered 5 out of 5 stars,   0 Comments )
Subject: Intro Finance Assignment Due by midnight on march 27th, 2005
Category: Business and Money > Finance
Asked by: inahurry-ga
List Price: $15.00
Posted: 27 Mar 2005 13:18 PST
Expires: 26 Apr 2005 14:18 PDT
Question ID: 501107
You recently invented a new board game and have done some market
research.  Your research indicates that board games generally have a
five-year life cycle with annual sales estimated to be:

Year 1	2,000 units
Year 2	5,000 units
Year 3	5,000 units
Year 4	4,000 units
Year 5	2,000 units

The game will sell at a competitive price of $25 per unit.  Variable
costs are $12 per unit and fixed costs are $8,000 per year.  You plan
to manufacture the game "in-house" and thus require an initial capital
expenditure of $60,000 and net working capital of $2,500.  The capital
equipment has a CCA rate of 20% for tax purposes and a salvage value
of $20,000.  Your marginal tax rate is 20%, and your cost of capital
is 16%.

Calculate the NPV and determine whether it makes sense to invest in
the opportunity.  Assume the asset pool is closed at the end of the
Subject: Re: Intro Finance Assignment Due by midnight on march 27th, 2005
Answered By: omnivorous-ga on 27 Mar 2005 16:16 PST
Rated:5 out of 5 stars
Inahurry ?

This is a relatively straightforward capital budgeting problem ?
though one has to be careful with the cash coming out in year 5.  I?ve
set up a spreadsheet to do the calculations and it?s clearly marked. 
The spreadsheet is here and will open in any browser.  You may wish to
save it in Excel because servers are unavailable from time-to-time. 
That will also enable you to edit it, should you want to do any
sensitivity analysis:

?Board Game NPV? (Mar. 27, 2005)

But there are some things to keep in mind regarding this problem:

1.	Using the Year 0 convention is the best way to represent cash
investments made up-front.
2.	Rather than divide each year?s cash flow by the NPV factor (1.16 in
year 1; 1.16 squared in year 2; etc.)  I find it easiest to do the
calculations by year, then multiply the NPV factor.  So year 1 =
1/1.16; year 2 = 1/(1.16)^2; etc.
3.	EBITDA is now used commonly by analysts; it stands for Earnings
Before Interest Taxes Depreciation & Amortization.  It?s convenient to
use here as a sub-total AND as a check.  Since only taxes come out of
it in this problem, that line minus Taxes should be Cash Flow - 
except for year 5 when we have several recuperations of funds.
4.	Year 5: I?ve broken the $20,000 into 2 pieces ? the $8,000 that?s
already been depreciated. You?ll owe a tax on the gain.

And the other $12,000 that?s really just recouping your initial
investment.  And the working capital that comes back out too!

The NPV of this investment is strongly positive at almost $56,000. 
So, it?s a definite ?Go.?

Best regards,

inahurry-ga rated this answer:5 out of 5 stars
Great answer as far as I know but I ended up doing another project so
I never used this question in my research.  Very quick response and
was very professional.  A+

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