Case Study: Acclaim Entertainment Inc.

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Case 1: Acclaim Entertainment

Capital Budgeting: Multiple Projects with Unequal Lives

Acclaim Entertainment, Inc. is a mass marketer of interactive entertainment software whose games can be played on such well known video game systems as Nintendo and Sega. Some of their more successful games include Mortal Kombat I and II, NBA Jam I and II, Maximum Carnage, Virtual Bart (Simpson), and NFL Quarterback. Acclaim has also obtained licenses from True Lies, Batman Forever, and Spiderman.

The interactive entertainment industry is characterized by rapid technological change and as such, no single hardware system has achieved long-term dominance. Accordingly, Acclaim focuses its production efforts on the development of software for the hardware systems that dominate the interactive entertainment market at a given point in time or in the very near future. Presently, Acclaim has licensing agreements with three industry leaders: Sony Computer Entertainment of America (SCE), Nintendo, and Sega.

Acclaim is currently in the design/production stage of a new version of Mortal Kombat. Since the previous versions of the game were extremely successful, Acclaim is not greatly concerned with the acceptance of the game by the general public. It is concerned, however, with the hardware platform that should be chosen to distribute the game.

Since licensing agreements are extremely short term, Acclaim wonders which of the three hardware companies should carry Mortal Kombat. For example, the licensing agreement with SCE expires in December two years from now. The Nintendo agreement expires in December of this year and the Sega contract expires in December of next year. While these contracts expire and have traditionally been renewed every few years, there is no guarantee they will be successfully renewed or extended in the future.

A further consideration involves the costs charged by each company. SCE, Nintendo, and Sega charge their licensees a fixed amount per unit

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