KADS, Inc., has spent $420,000 on research to develop a new computer game. The f

Question

KADS, Inc., has spent $420,000 on research to develop a new computer game. The firm is planning to spend $220,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $52,000. The machine has an expected life of three years, a $77,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $620,000 per year, with costs of $270,000 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 $110,000 at the beginning of the project. What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Explanation / Answer

YEARLY CASH FLOWS 0 1 2 3 Cost of Machine -220000 Shipping & installation -52000 Increase in NWC -110000 Net Revenue (620000-270000) 350000 350000 350000 Less: amortisation or research cost 140000 140000 140000 Less: MARCS depreciation 38858 66613 47581 EBT 171142 143387 162419 Tax @ 40% 68457 57355 64968 EAT 102685 86032 97451 Add: Depreciation and amortisations 178858 206613 187581 Cash from operations 281543 292645 285032 Resale value 77000 Tax shield on loss on sale 16779 Release of NWC 110000 NET PROJECT CASH FLOWS -382000 281543 292645 488812 PVIF @ 13% 1.00 0.884956 0.783147 0.69305 PV @ 13% -382000 249153 229184 338771 NPV 435108 Workings for depreciation: Double declining balance - 1/2 year Base Rate % Depn Accumu WDV year 1 272000 14.286 38858 38858 233142 2 272000 24.490 66613 105471 166529 3 272000 17.493 47581 153052 118948

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