KADS, Inc., has spent $380,000 on research to develop a new computer game. The f
ID: 2721192 • Letter: K
Question
KADS, Inc., has spent $380,000 on research to develop a new computer game. The firm is planning to spend $180,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $48,000. The machine has an expected life of three years, a $73,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $580,000 per year, with costs of $230,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $90,000 at the beginning of the project.
What will the cash flows for this project be?
Year 0
Year 1
Year 2
Year 3
KADS, Inc., has spent $380,000 on research to develop a new computer game. The firm is planning to spend $180,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $48,000. The machine has an expected life of three years, a $73,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $580,000 per year, with costs of $230,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $90,000 at the beginning of the project.
Explanation / Answer
Initial cash outflow =
Investment in research and machine =380000 + 180000 + 48000 = 608000
Depreciation : year 1 = 608000 * 14.29% = $86883, year 2 = @24.49% = $148899, year 3 = @17.49%=$106339
Initial working capital required = $90000
Salvage value at the end of 3rd year = $73000
Per year Cash Flow for the project=
year initial cash outflow $ Net Revenue (A) Depreciation (B) Net Income(C=A-B) After Tax Income(D=C*0.65) Cash Flow for the year $(E=D+B) 0 608000+90000 =698000 (698000) 1 350000 86883 263117 171026 257909 2 350000 148899 201101 130716 279615 3 350000+73000 = 423000 106339 316661 205830 312169 3 working capital 90000Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.