Reference no: EM132669939
Question - You have been tasked by the management team of the Warner Bros Group to evaluate the desirability of the development and launch of a new mobile app for NBC. Important details concerning this proposal is provided below:
The cost to develop the new app will be $3 million. This cost will be amortised using the straight line method over the 5 year life of the app.
The firm will spend $500,000 during year 1 to promote the app.
As a result of the introduction of the app, sales revenue is expected to grow by $1,820,000 in year 1. This is expected to increase by 2% p.a. over the life of the app. On average, cost of sales is expected to be 40% of sales revenue.
As a result of the introduction of the app, distribution costs are expected to grow by $60,000 in year 1. These costs are expected to increase by 1.5% p.a. over the life of the app.
Other ongoing costs to maintain the app are expected to be $80,000 p.a. over the life of the app.
At the end of years 2 and 4, the new app will require a major update. Each of these updates will cost $80,000.
The firm's tax rate is 30%. The firm requires a 16% required rate of return on all potential investments. All calculations must be performed in Excel.
Required - In relation to the above proposal:
1. Calculate the annual after tax cash flows and annual after tax profit.
2. Calculate the payback period.
3. Calculate the net present value.
4. Calculate the internal rate of return.
5. Calculate the accounting rate of return.
6. Provide an overview of key environmental factors that the firm should consider when evaluating the proposal.
7. Based on an assessment of the above and other factors, discuss whether the firm should go ahead with the proposal.
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