Schumacher has invented a business simulation called Drivepast which can be played on a personal computer. He is considering three different proposals via which to exploit the product.

Proposal 1- Sell all the rights in the game to a local computer company, Keypoint Limited. for the sum of E40,000 outright.

Proposal 2 – Sell all the rights in the game to Keypoint Ltd. for five annual amounts of E14,000 payable to him on the basis of one payment at the end of the year and the other four at yearly intervals, thereafter.

Proposal 3 – Set up a manufacturing company to produce and market the game. Schumacher 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 160,000
Total variable costs per year 100,000
Fixed costs per year 28,000


The working capital would be recovered at the end of year five and the plant will have a re-sale value of 10,000 euros. This proposal, if implemented, would also mean that Schumacher would need to give up his present employment.


(a) Consider each of the proposals and advise Schumacher on the relative merits of these proposals in financial terms. He has told you that his target rate of return is 12%. Your calculations should be made to the nearest whole E. Discount factors at 12% are as below

Year 1 2 3 4 5
Discount factor 0.893 0.797 0.713 0.636 0.567


(b) Advise Schumacher on what other factors he should also consider before making a final decision.

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