Ch 12 Problem #6: 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; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 35 percent, KADS has 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.

Complete the Ch 12 Problem #6 Excel worksheet and answer the following questions. Q.1 What will the cash flows for this project be? Q.2 According to the Management Report, should KADS go forward with the project?

Initial Investment Basis Cost of Equipment Cost of Installation Discount Rate Reinvestment Rate (for MIRR) Tax Rate Working Capital Commitment Sell Equipment at End of Project Management Summary NPV at 0% IRR MIRR r #NUM! First year change in revenue Revenues increaseldecrease each year at: First year change in expenses Expenses increaseldecrease each year at: 1st-Yr Cannibalization of Other Revenues Annual Cannibalization Increase/Decrease Incremental Income Statement #DIV/0! #DIV/0! 0.00 Payback Disc Payback 0.00 ar change in revenues cannibalization ch. expenses MACRS ch. depreciation EBIT TaxeS ch. Net Income S0 Book Value S0 Convert change in net income into change in cash flow Net Income add back depreciation OCF of Ne Equipment S0 S0 Cash flow from sale of equipment is calculated net of Initial Investment Basis Working Capital Commitm Sell Equipment at End of P Net change in CF S0 Net change in CF Cumulative CF Payback Discounted Net CF Disc Cumulative CF Disc Payback S0 S0 S0 S0 MACRS 3-year MACRS 5-year MACRS 7-year year 1 33.33% year 1 20.00% year 1 14.29% year 2 44.45% year 2 32.00% year 2 24. 49% year 3 14.81% year 3 19.20% year 3 17.49% year 4 7.41% year 4 11.52% year 4 12.49% year 5 11.52% year 5 8.93% year 6 5.76% year 6 8.92% year 7 8.93% year 8 4.46% Initial Investment Basis Cost of Equipment Cost of Installation Discount Rate Reinvestment Rate (for MIRR) Tax Rate Working Capital Commitment Sell Equipment at End of Project Management Summary NPV at 0% IRR MIRR r #NUM! First year change in revenue Revenues increaseldecrease each year at: First year change in expenses Expenses increaseldecrease each year at: 1st-Yr Cannibalization of Other Revenues Annual Cannibalization Increase/Decrease Incremental Income Statement #DIV/0! #DIV/0! 0.00 Payback Disc Payback 0.00 ar change in revenues cannibalization ch. expenses MACRS ch. depreciation EBIT TaxeS ch. Net Income S0 Book Value S0 Convert change in net income into change in cash flow Net Income add back depreciation OCF of Ne Equipment S0 S0 Cash flow from sale of equipment is calculated net of Initial Investment Basis Working Capital Commitm Sell Equipment at End of P Net change in CF S0 Net change in CF Cumulative CF Payback Discounted Net CF Disc Cumulative CF Disc Payback S0 S0 S0 S0 MACRS 3-year MACRS 5-year MACRS 7-year year 1 33.33% year 1 20.00% year 1 14.29% year 2 44.45% year 2 32.00% year 2 24. 49% year 3 14.81% year 3 19.20% year 3 17.49% year 4 7.41% year 4 11.52% year 4 12.49% year 5 11.52% year 5 8.93% year 6 5.76% year 6 8.92% year 7 8.93% year 8 4.46%