KADS, Inc., has spent $430,000 on research to develop a new computer game. The f
ID: 2761781 • Letter: K
Question
KADS, Inc., has spent $430,000 on research to develop a new computer game. The firm is planning to spend $230,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $53,000. The machine has an expected life of three years, a $78,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $630,000 per year, with costs of $280,000 per year. The firm has a tax rate of 40 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $115,000 at the beginning of the project.
What will the cash flows for this project be?
Explanation / Answer
R&D 430000 machine 230000 Instalation 53000 Total 713000 7 year 14.29 24.49 12.49 8.93 8.92 8.93 4.46 Revenue 6,30,000 6,30,000 6,30,000 Costs 2,80,000 2,80,000 2,80,000 Dpreciation 0.1429 0.2449 0.1249 Depreciation on machine 32867 56327 28727 Dpreciation on Installation 17,667 17,667 17,667 PBT 2,99,466 2,76,006 3,03,606 Tax rate 119786.53 110402.53 121442.53 PAT 1,79,679.8 1,65,603.8 1,82,163.8 Initial Investment -713000 Initial WC Investment -115000 PAT +dpreciation 2,30,213.5 2,39,597.5 2,28,557.5 185168.4
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