Your company has spent $340,000 on research to develop a new computer game. The

Question

Your company has spent $340,000 on research to develop a new computer game. The firm is planning to spend $54,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $6,400. The machine has an expected life of 7 years, a $39,000 estimated resale value, and falls under the MACRS 10-Year class life. Revenue from the new game is expected to be $440,000 per year, with costs of $240,000 per year. The firm has a tax rate of 40 percent, an opportunity cost of capital of 13 percent, and it expects net working capital to increase by $64,000 at the beginning of the project. What will be the net cash flow for year one of this project?

Explanation / Answer

Sales-costs $ 200,000.00 Less: Depreciation $      6,040.00 Profit before tax $ 193,960.00 Less: Tax@40% $    77,584.00 Profit after tax $ 116,376.00 Add: Depreciation $      6,040.00 Net cash flow for year 1 $ 122,416.00

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