Reference no: EM132535102
Development will take five years and the cost is $200,000 per year. To build hype and drive (future) sales, the company would need to spend an additional $50,000 in advertisement one year before the production (i.e. during the last year of development) and another $50,000 during the first year of production. After that the product will be well recognized on the market and will not need any additional marketing spending. Once in production, the expected revenues in the first year is $800,000, growing to $1,000,000 in the second year, and then declining by 25% every year thereafter forever. Development will take five years and the cost is $200,000 per year. To build hype and drive (future) sales, the company would need to spend an additional $50,000 in advertisement one year before the production (i.e. during the last year of development) and another $50,000 during the first year of production. After that the product will be well recognized on the market and will not need any additional marketing spending. Once in production, the expected revenues in the first year is $800,000, growing to $1,000,000 in the second year, and then declining by 25% every year thereafter forever.
a) What is the NPV as a function of cost of capital (r) of the "Ultimate PlayStation Killer"?
b) What is the NPV of the "Ultimate PlayStation Killer" if the cost of capital is 40%?
c) How many IRRs does this investment opportunity have? Can the IRR rule be used to evaluate this investment? Explain.
d) Based on your calculations, would recommend developing the "Ultimate PlayStation Killer"?