1. KADS, Inc. has spent $500,000 on research to develop a new computer game. The

Question

1.     KADS, Inc. has spent $500,000 on research to develop a new computer game. The firm is planning to spend $250,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $55,000. The machine has an expected life of three years, an estimated $80,000 resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $650,000 per year, with fixed costs of $300,000 per year. The firm has a tax rate of 30 percent, an opportunity cost of capital of 17 percent, and it expects net working capital to increase by $150,000 at the beginning of the project. What will the cash flows for this project be? (14 points)

Explanation / Answer

Year 0 1 2 3 Sales 0 6,50,000 6,50,000 6,50,000 Fixed Cost 0 3,00,000 3,00,000 3,00,000 Depreciation 0 43585 74695 53345 EBIT 0 3,06,416 2,75,306 2,96,656 TAXES 0 91924.65 82591.65 88996.65 Net Income 0 2,14,491 1,92,714 2,07,659 Depreciation 0 43,585 74,695 53,345 OCF 0 2,58,075 2,67,408 2,61,003 Net Working Capital -150000 150000 Machine cost -305000 cash flows for this project -455000 2,58,075 2,67,408 4,11,003 PV factor 17% 0.854701 0.730514 0.624371 Discounted Cash flow -455000 220577.2 195345.4 256618.4 Depreciation Rate 14.29% 24.49% 17.49% 305000 305000 305000 Depreciation 43585 74695 53345

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