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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, 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. )

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Based on the sales, costs, and depreciation, the first year cashflow is $240,003.75.

What is the first year cashflow?

This can be found as:

= ((Sales - Costs - Depreciation) x ( 1 - tax rate) ) + Depreciation

Sales = $600,000

Costs = $250,000

Depreciation for year one using MACRS is:

= 14.29% x (Cost of machine + Other capitalized cost)

= 14.29% x 250,000

= $35,725

First year cashflow is:

= ( (600,000 - 250,000 - 35,725) x (1 + 35%)) + 35,725

= $240,003.75

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