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.)

Year	0	1	2	3
FCF

Answer 1

Operating cash flow (OCF) each year = incremental income after tax + depreciation

Total cost of machine = purchase cost + installation cost

profit on sale of machine at end of year 3 = sale price - book value

book value is zero as the machine is fully depreciated.

after-tax salvage value = salvage value - tax on profit on sale of machine  

Project cash flow in year 0 = -(total cost of machine + investment in working capital)

Project cash flow in year 1 and 2 = OCF

Project cash flow in year 3 = OCF + terminal cash flow

terminal cash flow = after-tax salvage value + recovery of working capital

NPV is calculated using NPV function in Excel

NPV is $431,673.38