Assignment 1: Memo to Man

Assignment 1: Memo to Man

Assignment 1: Memo to ManagementLOL Pty Ltd is a video game development firm founded in 2012 that produces online games for mobile devices. LOL has brought two successful apps to market: Massive Fender-Bender and Daring Desserts. At the moment LOL is considering the introduction of a new app. In the past, projects have been evaluated in an ad hoc manner following now consistent capital budgeting process. However, under recent intense pressure from their main investor Dogged Pty Ltd, a venture capital firm, LOL?s CEO Jack Suave thinks that something needs to be done to improve the transparency, sophistication and consistency of project appraisal within the company. When Jack heard about this most recent new product proposal, he decided to call you, a leading financial consultant for online apps, for help in the appraisal process.Your task, as negotiated with Jack and specified in the consultancy contract’s scope, covers three key areas:Jack directed you to the project team members for the new app to help you collate base case figures for the project. Your point of contact is the project manager, Simon. He expects the new product to have sales of $1.8 million in its first year from in-game purchases, increasing by 40% in its second year due to one planned upgrade. Sales in its third year will remain the same as in its second year. Beyond that point it is increasingly difficult to make sales forecasts and Simon conservatively predicts that, in its fourth and fifth years, sales of the new product will decline to 60% and 20% of peak annual sales, respectively. After this time, no substantial sales (or associated expenses) are anticipated.Based on past experience with similar products, Simon has estimated that annual maintenance costs directly related to the new product, such as service and bug fixes, will be 35% of total annual sales revenue, while annual promotional costs will also be 35% of total annual sales. However, unlike the maintenance costs, the promotional costs are expected to occur in advance. In addition to these estimated costs, there are several costs specifically related to this new product proposal:? A specialised new software development platform costing $400,000 will be required. This platform is not expected to have any salvage value. The platform?s cost will be depreciated but there are two methods that could be used: (1) straight-line; or (2) diminishing value at a depreciation rate of 40% per year with the rate being 100% in the final year of the project.1 Since the company currently has no clear project evaluation policy or process, Jack has left it up to you as to what decision rule(s) you apply in assessing the project. He has asked, however, that you use a decision rule(s) the company can (and should) apply in future project analyses. Therefore you need to describe the rule(s) you decide to use and explain/justify why that rule(s) was chosen.

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