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This question was created from Capital Budgeting Exercise


I am using the BA II Plus calculator to calculate net present value for this problem. I am using -1,600,000 $595000 for the cash flows and a 6% discount rate over 3 years. I am coming up with $1078762.67 but dont feel like I am getting the correct answer.


I1] Cgm'tal Budgeting Exercise 2 Your company has spent $250,000 on research to develop a new computer game. The firm is
planning to spend $1,400,000 on a machine to produce the new game. Shipping and installation
costs for the new machine total $200,000 and these costs will he capitalized and depreciated
together with the cost of the machine. The machine will he used for 3 years, has a $200,000
estimated resale value at the end of three years, and will he depreciated straight line over it years.
Revenue from the new game is expected to he $1,200,000 per year, with costs of $500,000 per year. The firm has a tax rate of 35 percent, a cost of capital {discount rate) of 0 percent, and it
expects net working capital WC] to increase by $150,000 at the heginning of the project. This
investment in WC will he wholly recouped at the end of the project. . a} Complete the table helow.
h) In the second tahle belowr calculate the Net Present Value [NPW of the project. c) Calculate the Profitability Index {PI} of the project. Is the Internal Rate of Reunn (IRE) of the project greater than, equal to, or less than the cost of
capital (discount rate)? Should your company proceed with this project? Explain based on the decision criteria for NP‘J,
P], and IRE.

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