Your company is set to release the next version of a polpular video game. The co

Question

Your company is set to release the next version of a polpular video game. The company expects revenues of $100,000 during the first year, with reductions of $20,000 per year in years two through five. By year six, the comapny forecasts negligible revenues. However, the expects the costs associated with supporting this game with be constant during its five year existance. How much can the company afford to spend per year on support for this game in order ot break even? Use an interest rate of 7%. Round your answer to the nearest dollar.

Explanation / Answer

Suppose Constant Cost = C

Cash Flows :

Year 1 = 100,000 -C

Year 2 = 80,000 - C

Year 3 = 60,000 - C

Year 4 = 40,000 - C

Year 5 = 20,000 - C

NPV = 0

NPV = (100,000 - C)/1.07 + ( 80,000 - C)/1.07^2 + (60,000 - C)/ 1.07^3 + ( 40,000 - C) / 1.07^4 + (20,000 - C) /1.07^5

NPV = 257,086.4469 - 4.1*C = 0

C = $ 62,701 ...........(answer)

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