53.5
5. Your company, Fun with Finance, has just completed a $5
million marketing survey that suggests that your new computer
role-playing game: "A Day in the Life of Dr. J" is
going to be a big hit. Producing the game will require an
immediate $20 million capital investment in new equipment. At the
same time, cash on hand and raw materials will have to increase
from $3 million to $4 million, and remain at that level for the
life of the project. The game is expected to produce revenues of
$23 million per year and costs of $10 million per year for 4
years, starting one year from today. The new game will represent
5% of Fun with Finance revenues. Five percent of current overhead
costs is $0.7 million. Additionally, new managers and
administrative expenses required for the project will cost $0.5
million per year. Your tax rate is 40%. The new equipment will be
depreciated over 4 years to a book value of 0 using the
straight-line method. You have contracted to sell the equipment
for $2 million at the end of the fourth year, at which point
production will end and cash on hand and raw materials will
return to the original $3 million level. Assume that the correct
discount rate for this project is 11%. Show the relevant cash
flows for this project and compute its NPV. [20 pts]