KADS, Inc., has spent $340,000 on research to develop a new computer game. The f

Question

KADS, Inc., has spent $340,000 on research to develop a new computer game. The firm is planning to spend $140,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $44,000. The machine has an expected life of three years, a $69,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $540,000 per year, with costs of $190,000 per year. The firm has a tax rate of 40 percent, an opportunity cost of capital of 11 percent, and it expects net working capital to increase by $70,000 at the beginning of the project. What will the cash flows for this project be?

Explanation / Answer

Year Details of costs (Outflow)/Inflow Less: Tax @ 40% After-taxIncome Add: Depn.Tax-shield184000*MACRS Net Cash flow for the Year PV @ 11% COC PV @11 % 0 Cost of machine -140000 0 Shipping& Installation costs -44000 0 Increase of N/W -70000 0 Total initial costs -254000 -254000 1 -254000 1 Revenue- Costs 350000 140000 210000 26293.6 236293.6 0.9009 212876.9 2 Revenue- Costs 350000 140000 210000 45061.6 255061.6 0.81162 207013.1 3 Revenue- Costs 350000 140000 210000 32181.6 242181.6 0.73119 177080.8 3 Resale value 69000 27600 41400 41400 0.73119 30271.27 3 Release of N/W 70000 70000 70000 0.73119 51183.3 Undiscounted Cash flows 590936.8 NET PRESENT VALUE OF CASH FLOWS   discounted @ 11% COC = 424425.3

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