The firm is planning to spend $20,000 on a machine to produce the new game. Ship

Question

The firm is planning to spend $20,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $1,000. The machine has an expected life of 3 years, a $2,000 estimated resale value, and falls under the MACRS 3-Year class life. Revenue from the new game is expected to be $50,000 per year, with costs of $30,000 per year (excluding depreciation). The firm has a tax rate of 20 percent, an opportunity cost of capital of 10 percent, and it expects net working capital to increase by $5,000 at the beginning of the project. What will be the net cash flow for year one of this project?

Explanation / Answer

Net Cash flow for Year 1:

Note: The puchase cost incurred and increase in working capital is happened at the beginning of the project that is at Year 0, Hence not included.

Particulars Amount ($) Revenue 50,000 Less: Costs 30,000 Less: Depreciation @ 33.33% 7,000 cash flow 13,000 Tax @ 20% 2,600 Net Cash Flow 10,400

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