KADS, Inc. has spent $380,000 on research to develop a new computer game. The firm is...

KADS, Inc. has spent $380,000 on research to develop a new computer game. The firm is planning to spend $180,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $48,000. The machine has an expected life of three years, a $73,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $580,000 per year, with costs of $230,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $90,000 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.)

Year 0

Year 1

Year 2

Year 3

Expert Solution

Depreciation Schedule
Year	Opening Balance	Depreciation Base	Depreciation %	Depreciation	Closing Balance
A	B	C	D	*E = CD**	F = B-E
1	228000	228000	14.29%	32581.2	195418.8
2	195418.8	228000	24.49%	55837.2	139581.6
3	139581.6	228000	17.49%	39877.2	99704.4

Calculation of Annual Cash Flows
Particulars	0	1	2	3
Initial Investment
Cost of machine	-180000
shipping and installation costs	-48000
Investment in net working capital	-90000
Net Investment (A)	-318000
Operating Cash Flows
Annual Revenue (B)		580000	580000	580000
Annual Costs (C )		230000	230000	230000
Depreciation (D)		32581.2	55837.2	39877.2
Profit Before Tax (E = B-C-D)		317418.8	294162.8	310122.8
Tax @21% (F = E*21%)		66657.948	61774.188	65125.788
Profit After Tax (G = E-F)		250760.852	232388.612	244997.012
Add back Depreciation (H = D)		32581.2	55837.2	39877.2
Net Operating Cash Flows (I = G+H)		283342.052	288225.812	284874.212
Terminal Value
Sale Value (J)				73000
Book value (K)				99704.4
Loss on sale (L = J-K)				-26704.4
Tax credit on loss (M = -L*21%)				5607.924
After tax loss (N = J+M)				78607.924
Recovery of net working capital (O)				90000
Net Terminal value (P = N+O)				168607.924
Total annual cash flows (Q = A+I+P)	-318000	283342.052	288225.812	453482.136

Cash Flow in Year 0 is -$318,000

Cash Flow in Year 1 is $283,342.05

Cahs Flow in Year 2 is $288,225.81

Cash Flow in Year 3 is $453,482.14

jeff jeffy answered 2 years ago

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