Atari Corporation`s Decision Making

Atari Corporation`s Decision Making



Atari Corporation`s Decision Making

Capital Budgeting of Atari VCS2600

 

Beginning 1976 1,976 1,977 1,978 1,979 1,980 1,981 1,982 1,983 1,984 1,985 1,986 1,987 Year - 1 2 3 4 5 6 7 8 9 10 11 12 Sales (Systems) 5,600,000 5,600,000 5,600,000 5,600,000 173,600,000 341,600,000 509,600,000 677,600,000 474,320,000 332,024,000 232,416,800 162,691,760 113,884,232 Sales (Games) 4,000,000 4,000,000 4,000,000 4,000,000 124,000,000 244,000,000 3,644,000,000 484,000,000 338,800,000 237,160,000 166,012,000 116,208,400 81,345,880 Variable Costs (Systems) 40,000,000 40,000,000 40,000,000 40,000,000 124,000,000 244,000,000 124,000,000 484,000,000 338,800,000 237,160,000 166,012,000 116,208,400 81,345,880 Variable Costs (Games) 3,000,000 3,000,000 3,000,000 3,000,000 93,000,000 183,000,000 93,000,000 363,000,000 254,100,000 177,870,000 124,509,000 87,156,300 61,009,410 Fixed Costs 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000 Other Costs (If Relevant) Depreciation 4,833,333 4,833,333 4,833,333 4,833,333 4,833,333 4,833,333 4,833,333 4,833,333 4,833,333 4,833,333 4,833,333 4,833,333 4,833,333 EBIT

- 63,233,333

-63,233,333

-63,233,333

-63,233,333 50,766,667 128,766,667 3,906,766,667 284,766,667 190,386,667 124,320,667 78,074,467 45,702,127 23,041,489 Taxes - 15,230,000 38,630,000 1,172,030,000 85,430,000 OCF

- 63,233,333

-63,233,333

-63,233,333

-63,233,333 35,536,667 90,136,667 2,734,736,667 199,336,667 190,386,667 124,320,667 78,074,467 45,702,127 23,041,489 PROJECT Capital Investment

- 3,500,000 Working Capital

- 2,500,000 2,500,000 OCF

- 60,733,333

-63,233,333

-63,233,333

-63,233,333 35,536,667 90,136,667 2,734,736,667 199,336,667 190,386,667 124,320,667 78,074,467 45,702,127 25,541,489 EVALUATION Present Value (22% discount rate)

- 60,733,333

-51,830,601

-42,484,099

-34,823,032 16,041,219 33,350,499 829,385,674 49,552,820 38,793,404 20,763,705 10,688,351 5,128,357 2,349,245 NPV 669,001,810

The subsequent chart shows a simple NPV analysis for a core Atari Corporation, exploiting the internally existing to finance the project. To shorten matters, the entire investment is ended at the starting of the project.

The useful life of the development is set at 12 years. The NPV of Atari VCS2600 is $ 1022152208 which is in positive this suggests that the project is in favor, so Atari may go for the investment, initially the project does not seems to be a favorable project because from 1976 to 1978 the operating cash flows are in negative, and company is facing heavy loss, but from 1979 till 1982 the sale of Atari VCS2600 increased by 1.5 million dollars, and company started to run in profitable regime. As the NPV is in positive therefore it is suggested to accept the project, NPV compares the future dollar Value with the same dollar value today, so this can be said that project has the potential to give profitable results for Atari.

The approach of IRR can also be used to verify the result, and the ...