Question

Rate of Return Question

Kwame is a board game developer and he has an idea for a new product. He’s presented his idea to a major toy company and they’ve expressed an interest in his game. They’ve struck a deal – Kwame is responsible to develop the game at his own expense, and when it's ready for retail the company will pay him to license it for ten years.

Based on his previous experience, he knows the entire process (research, development, testing, etc.) will take four years. He also knows that his initial expense to get started will be $150,000.00, and then he plans on spending that amount again at the end of year two and year four.

At that point, when the game is ready for market, the toy company will pay him a lump sum of $100,000.00, plus an annual fee of $90,000.00 per year for the next decade.

What is the rate of return on Kwame’s financial investment in the game?

Answer 1