Your company has spent $310,000 on research to develop a new computer game. The

Question

Your company has spent $310,000 on research to develop a new computer game. The firm is planning to spend $51,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $6,100. The machine has an expected life of 10 years, a $36,000 estimated resale value, and falls under the MACRS 15-Year class life. Revenue from the new game is expected to be $410,000 per year, with costs of $210,000 per year. The firm has a tax rate of 40 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $61,000 at the beginning of the project. What will be the net cash flow for year one of this project?

$121,142

$-58,242

$120,000

$1,142

Explanation / Answer

MACR depreciation for year 1 = $57100*5% = $2855

Net cash flow for year 1

= ($410000 - $210000 - Depreciation)*(1-Tax rate)+Depreciation

=($200000-$2855)(0.6) + $2855

=$121142

Therefore correct answer is 1st option i.e. $121142

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