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Determine if herro should buy the equipment the project

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Herro Inc. is considering the development of a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine total $50,000. The project has a life of four years. At that time the machine is expected to be sold for $75,000. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 25 percent. The company expects net working capital to increase by $100,000 at the beginning of the project. The company has a cost of capital of 12 percent.

Required:

Question 1: Use net present value to determine if Herro should buy the equipment and undertake the project and explain

Reference no: EM132512344

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