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
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 MACRSLinks to an external site. 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.
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1. What will the cash flows for this project be?
2. According to the Management Report, should KADS go forward with the project?
\begin{tabular}{l|l|l|} \hline Initial Investment Basis & $0 & Cost of Equipment \\ \cline { 2 - 3 } First year change in revenue & & Cost of Installation \\ \hline Revenues increase/decrease each year at: & & Discount Rate \\ \cline { 2 - 4 } First year change in expenses & & Reinvestment Rate (for MIRR) \\ \cline { 2 - 4 } Expenses increase/decrease each year at: & & Tax Rate \\ \cline { 2 - 4 } 1st-Yr Cannibalization of Other Revenues & & Working Capital Commitment \\ \cline { 2 - 3 } & & Sell Equipment at End of Project \end{tabular}Step by Step Solution
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