Your company has spent $270,000 on research to develop a new computer game. The

Question

Your company has spent $270,000 on research to develop a new computer game. The firm is planning to spend $47,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,700. The machine has an expected life of 10 years, a $32,000 estimated resale value, and falls under the MACRS 15-Year class life. Revenue from the new game is expected to be $370,000 per year, with costs of $170,000 per year. The firm has a tax rate of 30 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $57,000 at the beginning of the project. What will be the net cash flow for year one of this project?

Explanation / Answer

MACRS 15-Year class life Year Dep is 5%

Initial Inv = 47000+5700 = 52700

Y1 Dep using MCARS = 5%*52700 =2635

Revenue 370000

Less Cost 170000

Less DEP 2635

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EBT 197365

Less Tax 30% 59210

--------------------

PAT 138155

Add back Dep 2635

----------------

OCFY1 140790

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