Your company has spent $320,000 on research to develop a new computer game. The

Question

Your company has spent $320,000 on research to develop a new computer game. The firm is planning to spend $52,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $6,200. The machine has an expected life of 3 years, a $37,000 estimated resale value, and falls under the MACRS 5-Year class life. Revenue from the new game is expected to be $420,000 per year, with costs of $220,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 14 percent, and it expects net working capital to increase by $62,000 at the beginning of the project. What will be the net cash flow for year one of this project?

Explanation / Answer

cash flow for year 1 =

sales    420,000

less:cost(220,000)

depreciation (11,640)                                   [(52000+6200 ) *.20 ]

Income before tax - 188,360

less:Tax                (65,926)

Income after tax     122,434

Add:depreciation     11,640

cash flow for year 1   134,074

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