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The finance team scheduled a series of meetings to discuss the different aspects of the project analysis. Sanford Tassel, Senior Vice President, Finance and Operations, Dikran Yapoujian, Vice President, Finance and otter members of the finance- decision support team held a series of discussions. Some excerpts from their discussions follow:
We would need to immediately approve a capital allocation of $1.70 million to jump-start the project. In addition, we would need to capitalize another $20.5 million almost equally for the next three years. These expenses will be incurred on an after-tax basis. The first year of the project is unlikely to bring any additional revenues, but from second year, we should see revenues increase by $1.800 million. Our preliminary estimates also show revenues growing . $9.700 million in year 2, $19.300 million in year 3, $22.300 million in year 4, and $24,100 million in year 5.
I am also attaching some information the team used for the cash flow valuation. S. you la.r to go over the numbers.
The analysts on the team created pro forma estimates of the expected cash flows that the project is likely to generate and also discussed some assumptions:
• Revenue estimates are based on the expectation of a higher price point resulting from a more robust product.
• Operating expenses include internal labor, maintenance, overhead expense, and cost avoidance from being able to ramp down spending on existing platforms
• The capitalized expenses include the cos. of platform development, content creation, internal and external labor, computers, facility investment, and so on. These expenses are amortizable and depreciable over the first three of the six years of the project, expected life. They are recognized separately from the normal depreciation and amortization expenses.
• These capital expenses will be deducted from the project, annual cash flow from operations to derive at the project, total expected cash flows.
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