- 10 Marks
FM – L2 – Q74 – Discounted Cash Flow
Calculate NPV for TechNova Ltd's new game Zestora, considering sales, costs, and tax over four years.
Question
TechNova Ltd
(a) TechNova Ltd, a software company, has developed a new game “Zestora” which it plans to launch in the near future. Sales volumes, production volumes, and selling prices for “Zestora” over its four-year life are expected to be as follows:
| Year | Sales and production (units) | Selling price (GH₵ per game) |
|---|---|---|
| 1 | 15,000 | 45 |
| 2 | 25,000 | 40 |
| 3 | 20,000 | 38 |
| 4 | 10,000 | 35 |
Financial information relating to the production of Zestora:
| Item | GH₵ per game |
|---|---|
| Direct materials | 6 |
| Direct labour | 8 |
| Variable production overheads | 4 |
Additional information:
- Annual fixed production overheads will be GH₵150,000.
- Initial investment in equipment will be GH₵800,000.
- Additional working capital of GH₵50,000 will be needed at the beginning of the project and will be released at the end of year four.
- Tax at the rate of 25% is payable on profits one year in arrears.
- Capital allowance is available at 25% per year on a reducing balance basis.
- TechNova Ltd’s cost of capital is 10%.
- The equipment will have no residual value at the end of year four.
Required: Calculate the net present value of the proposed investment and comment on your findings.
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