Investment Appraisal

Charm Inc., a software company, has developed a new game, ‘Fingo’, which it plans to launch in the near future. Sales volumes, production volumes and selling prices for ‘Fingo’ over its four-year life are expected to be as follows: Year 1
Year 2
Year 3
Year 4
Sales and production units
150,000
70,000
60,000
60,000
Selling price ($ per game)
$25
$24
$23
$22
Financial information on ‘Fingo’ for the first year of production is as follows:
Direct material cost $5.40 per game
Other variable production cost $6.00 per game
Fixed costs $4.00 per game
Advertising costs to stimulate demand are expected to be $650,000 in the first year of production and $100,000 in the second year of production. No advertising costs are expected in the third and fourth years of production. Fixed costs represent incremental cash fixed production overheads. ‘Fingo’ will be produced on a new production machine costing $800,000, which will be invested at the start of the project (Year 0).
Charm Inc. uses a discount rate of 10% when appraising new capital investments. Ignore inflation.
Required: Calculate the net present value of the proposed investment and comment on your findings.