Problem: Glenn has invented a business game called Cashproflow which can be played on a personal computer. He is considering three different proposals via which to exploit the product.
1. Sell all the rights in the game to a local computer company, Keypoint Ltd. for the sum of £40,000 outright.
2. Sell all the rights in the game to Keypoint Ltd. for five annual amounts of £14,000 payable to him on the basis of one payment immediately and the other four at yearly intervals, thereafter.
3. Set up a manufacturing company to produce and market the game. Glenn estimates that the following data would be relevant over a period of the next five years:
Cost of initial plant £40,000
Initial working capital 10,000
Annual sales 200,000
Variable costs per year 100,000
Fixed costs per year 27,000
The working capital would be recovered at the end of year five. Depreciation of £7,000 per annum is included in the fixed costs. This proposal, if implemented, would also mean that Glenn would need to give up his present employment for which he currently earns £30,000 per annum.
Required:
(1) Consider each of the proposals and advise Glenn on the relative merits of these proposals in financial terms using Payback and NPV tools. He has told you that his target rate of return is 20%.
(2) Advise Glenn on what other factors he should also consider before making a final decision.
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