Question

KADS, Inc. has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated using bonus depreciation; they total $50,000. The machine has an expected life of three years and a $75,000 estimated resale value. Revenue from the new game is expected to be $600,000 per year, with fixed costs of $250,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 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.)

FCF for year 0

Year 1

Year 2

Year 3

Answer 1

Cash Flow :

• Year 0 = -350,000
• Year 1 = $ 329,000
• Year 2 = $ 276,500
• Year 3 = $ 435,750

Explanation:

Year 0 Cash flow = -Plant Cost - Installation cost - Increase in net working capital

Year 0 Cash flow = -200000-50000-100000

Year 0 Cash flow = -350000

Year 1 Cash Flow = (Annual Revenue - Annual Cost)*(1-tax rate) + Bonus Depreciation x tax rate

Year 1 Cash Flow = (600000-250000)*(1-21%) + (200000+50000)*100% * 21%

Year 1 Cash Flow = 329000

Year 2 Cash Flow = (Annual Revenue - Annual Cost)*(1-tax rate)

Year 2 Cash Flow = (600000-250000)*(1-21%)

Year 2 Cash Flow = 276500

Year 3 Cash Flow = (Annual Revenue - Annual Cost)*(1-tax rate) + Post tax salvage value + Working capital recover

Year 3 Cash Flow = (600000-250000)*(1-21%) + 75000*(1-21%) + 100000

Year 3 Cash Flow = 435750

I hope this clear your doubt.

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