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GameSoft, Inc.

• GameSoft, Inc. develops entertainment software for PCs and sells them exclusively
online. Customers download the software directly to their PCs after purchasing a license.
Consequently, the company maintains no physical inventory.
• GameSoft is creating a new division to sell a line of “edutainment” software titles for
children. This new division will have its own P&L. (The division’s financials will be
evaluated as if it were a separate company.)
• All customers pay by credit card, so there are no accounts receivable. Credit card
transaction fees average 3% of the purchase price.
• Software titles will sell for $30.00 on average. The division expects 25,000 unit sales in
the first year. Unit sales volume is expected to grow by 10% in Years 2 and 3. A 5%
growth rate is expected for years 4 and 5. No change in unit prices is expected during this
period.
• The new Web site and software titles have recently cost a total of $400,000 to develop.
• Marketing expenses for the division are projected to be $100,000 per year.
• The division will have to hire a staff of 10 people to support and maintain the products at
an average cost of $5,000 per month for each employee.
• The Web hosting service costs $500 per month. There is an additional $0.10 transaction
fee on each sale to cover bandwidth usage.
• The division will spend $2,500 per month on rent, plus an additional $1,000 per month
for utilities (phone, electricity, Internet access, etc.).
• The division will depreciate and amortize its assets at a rate of $25,000 per year on a
straight-line basis.
• The parent company will charge its new division $1,500 per month for back office
support. (This will be a real cash expense, not a paper one.)
• GameSoft estimates its cost of capital (i.e., its discount rate) to be 18% for purposes of
capital investment decisions.
• The Company’s effective tax rate is 35%. For purposes of your analysis, losses should
not be carried forward to offset future taxes.
• The Company projects that it will sell off its new division to a larger game company at
the end of five years at a 4X EBITDA multiple.
• To clarify, all expenses will be paid as incurred (i.e., no accrued liabilities or prepaid
expenses). The new division will not require any working capital or have recurring
capital expenditures.

Questions:
• What is the value of GameSoft’s new division, based on the sum of its projected free cash
flows, excluding the initial investment, discounted back to present value?
• What is the expected NPV of this investment using the assumptions given above?
• What is the expected IRR of this investment?

Starting from the simple unit economics given in the case, you should create a free cash flow
analysis that will allow you to answer the three questions outlined above. Please e-mail your
spreadsheet showing all interim calculations as well as your answers to the above questions to
Acton MBA (actonmba@ufm.edu).

Copyright  2007 by the Acton Foundation for Entrepreneurial Excellence. No part of this publication may
be reproduced, stored in a retrieval system, or transmitted in any form – without the written permission of
Brad Bentz or the Acton Foundation for Entrepreneurial Excellence, 515 Congress Avenue, Suite 1875,
Austin, TX 78701.