KADS, Inc., has spent $460,000 on research to develop a new computer game. The f
ID: 2762300 • Letter: K
Question
KADS, Inc., has spent $460,000 on research to develop a new computer game. The firm is planning to spend $260,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $56,000. The machine has an expected life of three years, a $81,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $660,000 per year, with costs of $310,000 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 $130,000 at the beginning of the project.
What will the cash flows for this project be?
KADS, Inc., has spent $460,000 on research to develop a new computer game. The firm is planning to spend $260,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $56,000. The machine has an expected life of three years, a $81,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $660,000 per year, with costs of $310,000 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 $130,000 at the beginning of the project.
Explanation / Answer
Year 0 1 2 3 Sales $0.00 $660,000 $660,000 $660,000 Less Fixed cost 0 310,000 310,000 310,000 Less -Depreciation 0 45,156.40 77,388.40 55,268.40 EBIT $0.00 $304,843.60 $272,611.60 $294,731.60 Less -Taxes 0 106,695.26 95,414.06 103,156.06 Net income $0.00 $198,148.34 $177,197.54 $191,575.54 Add +Depreciation 0 45,156.40 77,388.40 55,268.40 OCF $0.00 $243,304.74 $254,585.94 $246,843.94 Less -NWC 130,000.00 0 0 -130,000.00 Less -FA 316,000.00 0 0 -101,015.38 FCF -$446,000.00 $243,304.74 $253,585.94 $477,859.32
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