You are a product manager at a game developer and are contemplating the launch of an innovative adventure role-playing game titled "Mystic Quest." The strategy involves marketing and selling the game over a five-year period before competitors potentially emulate its features. Market research conducted at a cost of $40,000 last year indicates potential sales of 120,000 copies in the first year at $60 per copy, with an estimated annual cost of goods sold of $25 per copy. Subsequently, the number of copies sold is anticipated to decrease by 15% compared to the previous year each year. An immediate capital investment of $1,200,000 is necessary for acquiring new servers and their installation, depreciated straight-line to $0 over five years. Net working capital will initially increase by $500,000, maintaining this level in the first year, but will decrease by $300,000 in the second year and by another $200,000 in the fifth year, returning to its original level. Launching "Mystic Quest" may lead to a reduction in revenue from other role-playing games by $700,000 annually. Expanding the marketing team will result in an increase in annual salary expenses by $300,000. If "Mystic Quest" isn't developed, the software engineers could contribute to another project, potentially yielding $550,000 in profit each year. The project's cost of capital is 12%, and the company's marginal tax rate is 30%. Q1-What would be the break-even side effect?
You are a product manager at a game developer and are contemplating the launch of an innovative adventure role-playing game titled "Mystic Quest." The strategy involves marketing and selling the game over a five-year period before competitors potentially emulate its features. Market research conducted at a cost of $40,000 last year indicates potential sales of 120,000 copies in the first year at $60 per copy, with an estimated annual cost of goods sold of $25 per copy. Subsequently, the number of copies sold is anticipated to decrease by 15% compared to the previous year each year. An immediate capital investment of $1,200,000 is necessary for acquiring new servers and their installation, depreciated straight-line to $0 over five years. Net working capital will initially increase by $500,000, maintaining this level in the first year, but will decrease by $300,000 in the second year and by another $200,000 in the fifth year, returning to its original level. Launching "Mystic Quest" may lead to a reduction in revenue from other role-playing games by $700,000 annually. Expanding the marketing team will result in an increase in annual salary expenses by $300,000. If "Mystic Quest" isn't developed, the software engineers could contribute to another project, potentially yielding $550,000 in profit each year. The project's cost of capital is 12%, and the company's marginal tax rate is 30%. Q1-What would be the break-even side effect?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:<Excel Assignment 2: Capital budgeting case>
You are a product manager at a game developer and are contemplating the launch of an
innovative adventure role-playing game titled "Mystic Quest." The strategy involves marketing
and selling the game over a five-year period before competitors potentially emulate its features.
Market research conducted at a cost of $40,000 last year indicates potential sales of 120,000
copies in the first year at $60 per copy, with an estimated annual cost of goods sold of $25 per
copy. Subsequently, the number of copies sold is anticipated to decrease by 15% compared to the
previous year each year. An immediate capital investment of $1,200,000 is necessary for
acquiring new servers and their installation, depreciated straight-line to $0 over five years. Net
working capital will initially increase by $500,000, maintaining this level in the first year, but
will decrease by $300,000 in the second year and by another $200,000 in the fifth year, returning
to its original level. Launching "Mystic Quest" may lead to a reduction in revenue from other
role-playing games by $700,000 annually. Expanding the marketing team will result in an
increase in annual salary expenses by $300,000. If "Mystic Quest" isn't developed, the software
engineers could contribute to another project, potentially yielding $550,000 in profit each year.
The project's cost of capital is 12%, and the company's marginal tax rate is 30%.
Q1-What would be the break-even side effect?
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