As a budding entrepreneur, you generate a brilliant idea. You know that Georgetown
has a large population of geriatrics who love Readerâs Digest. You pitch the idea to the
publisher of the magazine of producing CD-ROMâs that will contain the text of all of the
articles published in it since the first issue. You provide the publisher with the following
information in the proposal:
⢠You have will to complete market testing for the product to prove that there is a
market for the electronic versions of the magazine. This market testing will cost $ 5
million in Year 0.
⢠Readerâs Digest will have to invest $ 25 million in new computers, CD-ROM drives and
other equipment. This equipment will have a life of 4 years, at the end of which it is
estimated to have an after-tax salvage value of $ 5 million. You assume you will sell the
equipment in the fifith year.
⢠During the 4-year period, the computers will be depreciated straight-line down to its
after-tax salvage value of $5 million. You would then sell the computers.
⢠It is anticipated that 300,000 CD-ROMs will be sold each year for the next 4 years, at a
price of $ 50 per CD-ROM. The cost of producing and packaging each CD is $ 10.
⢠There will be 10 full time employees and the total payroll for these employees is
expected to be $ 2 million per year for the next 4 years.
⢠The firm will have to maintain a level of working capital for the project equal to 10%
of revenues. This investment will have to be made at the beginning of the first year, and
will be entirely recovered in the fifth year.
⢠The total annual advertising budget for Readerâs Digest, which is currently $ 25
million each year, is expected to increase to $ 27.5 million each year as it advertises for
the new CD-ROMs.
⢠The firm has a tax rate of 35%.
⢠Projects this risky in the past have returned 13% for Readerâs Digest.
a. Does the magazine reject your offer? Why or why not?
b. Instead of CD-ROMS, you offer to place the old magazines on jump drives. This would
reduce the number of computers needed, reducing the amount spent on them from $25
million to $20 million. If you can depreciate this new amount of computers down to an
after-tax salvage value of $4 million, would that affect their decision at all?
As a budding entrepreneur, you generate a brilliant idea. You know that Georgetown
has a large population of geriatrics who love Readerâs Digest. You pitch the idea to the
publisher of the magazine of producing CD-ROMâs that will contain the text of all of the
articles published in it since the first issue. You provide the publisher with the following
information in the proposal:
⢠You have will to complete market testing for the product to prove that there is a
market for the electronic versions of the magazine. This market testing will cost $ 5
million in Year 0.
⢠Readerâs Digest will have to invest $ 25 million in new computers, CD-ROM drives and
other equipment. This equipment will have a life of 4 years, at the end of which it is
estimated to have an after-tax salvage value of $ 5 million. You assume you will sell the
equipment in the fifith year.
⢠During the 4-year period, the computers will be depreciated straight-line down to its
after-tax salvage value of $5 million. You would then sell the computers.
⢠It is anticipated that 300,000 CD-ROMs will be sold each year for the next 4 years, at a
price of $ 50 per CD-ROM. The cost of producing and packaging each CD is $ 10.
⢠There will be 10 full time employees and the total payroll for these employees is
expected to be $ 2 million per year for the next 4 years.
⢠The firm will have to maintain a level of working capital for the project equal to 10%
of revenues. This investment will have to be made at the beginning of the first year, and
will be entirely recovered in the fifth year.
⢠The total annual advertising budget for Readerâs Digest, which is currently $ 25
million each year, is expected to increase to $ 27.5 million each year as it advertises for
the new CD-ROMs.
⢠The firm has a tax rate of 35%.
⢠Projects this risky in the past have returned 13% for Readerâs Digest.
a. Does the magazine reject your offer? Why or why not?
b. Instead of CD-ROMS, you offer to place the old magazines on jump drives. This would
reduce the number of computers needed, reducing the amount spent on them from $25
million to $20 million. If you can depreciate this new amount of computers down to an
after-tax salvage value of $4 million, would that affect their decision at all?