Your company has spent $400,000 on research to develop a new computer game. The
ID: 2696366 • Letter: Y
Question
Your company has spent $400,000 on research to develop a new computer game. The firm is planning to spend $600,000 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 will be used for 3 years, has a $100,000 estimated resale value at the end of three years, and will be depreciated straight line over 4 years. Revenue from the new game is expected to be $800,000 per year, with costs of $300,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 8 percent, and it expects net working capital to increase by $150,000 at the beginning of the project. Should you proceed with this project? Explain.
Year
0
1
2
3
Sales
Fixed Costs
Depreciation
EBIT
Taxes
Net Income
Operating
Cash Flow
Change in NWC
Change
In Fixed Assets
Total
Cash Flow
Should you proceed with this project? Explain.
Year
0
1
2
3
Sales
Fixed Costs
Depreciation
EBIT
Taxes
Net Income
Explanation / Answer
yes continue
its profitable
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