This analysis is about the new gaming device which designed by IMH Computer Gaming INC. This device is for running virtual New Zealand Survival tests, such as the survival test involves keeping dry during a Wellington Southerly. As Ian and the companies’ CFO Knight Bowden asked me to provide a recommendation on whether to go ahead with the investment, I do some analysis to get the appropriate result as a reference to help them to make the decision. According to the analysis I got the result bellow which may help them to make the final decision.
Note: the result below is provided from the bullet form: a. Year 3 (t=3) revenue from web sales = $1272215.31
b. Year 3 (t=3) revenue from store sales = $707008.93
c. Year 3 (t=3) operating cash flows = $475924.99
d. Year 3 (t=3) cash flow from assets = $459331.77
e. Year 1 (t=1) change in NWC = $14384.43
f. Year 4 (t=4) after-tax salvage value of the equipment = $607,978
g. The floatation costs = $-84706.51
h. Year 0 (t=0) cash flow from assets = $-1787260.52
i. Weighted Average Cost of Capital (WACC) = 0.1193
j. NPV = $116,798.96
k. IRR = $0.14
l. NPV where t=1 Price (Web) = 37 and Price (Retail) = 47 = $-141,400.80
m. NPV where t=1 Price (Web) = 42 and Price (Retail) = 52 = $262,036.33
First, as can be seen from the information above, after the analysing we got the positive NPV= $116,798.96 of this 4 year project. As we know for the project which has positive NPV it is expected to produce more income than what could be gained by earning the discount rate. So that I think the company should go ahead with the project.
On the other hand we can focus on IRR, as this 4 year project has the cash out flow at Date 0 which is called the investing project. The rule applied for this type of project is Accept the project if the IRR is greater than the discount rate and reject the project if the IRR is less than the discount rate. Now we got the IRR=14% which means , if Ian and Knight Bowden happy with the expected return which less than 14%, we should accept the project otherwise we should abandon the project if they have expected return higher than 14%.
What’s more, according to the data table, we can see:
This table shows the NPV changed along with different combination of Web price and Retail price. When we set the Web Price at $35 dollars per unit, we can’t get the