KADS, Inc., has spent $480,000 on research to develop a new computer game. The f
ID: 2648391 • Letter: K
Question
KADS, Inc., has spent $480,000 on research to develop a new computer game. The firm is planning to spend $280,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $58,000. The machine has an expected life of three years, a $83,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $680,000 per year, with costs of $330,000 per year. The firm has a tax rate of 40 percent, an opportunity cost of capital of 13 percent, and it expects net working capital to increase by $140,000 at the beginning of the project.
What will the cash flows for this project be in year 0, 1, 2, and 3?
KADS, Inc., has spent $480,000 on research to develop a new computer game. The firm is planning to spend $280,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $58,000. The machine has an expected life of three years, a $83,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $680,000 per year, with costs of $330,000 per year. The firm has a tax rate of 40 percent, an opportunity cost of capital of 13 percent, and it expects net working capital to increase by $140,000 at the beginning of the project.
Explanation / Answer
Solution - To solve this we need to calculate the Depreciation as per the MACRS schedule 7-year class life where the Depreciation for three years would be as below
Cost of Asset ( Cost +Shipping+Installation) = $280000 + 58000 = 338000
So Book Value at the end of three years = $147807
so if $83,000 is the estimated resale value ( Or if Sold at $83000 at the end of three years) there will be a Capital Loss and it means the Tax effect will be reversed in favour for the loss ie 40 % on ($147807-$83,000) = 25293
Below is the Cash Flow Calculation
Year1 Year2 Year3 Total Depreciation Rate 14.29% 24.49% 17.49% Depreciation 48300.2 82776.2 59116.2 190192.6Related Questions
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