Your company has spent $220,000 on research to develop a new computer game. The

Question

Your company has spent $220,000 on research to develop a new computer game. The firm is planning to spend $42,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,200. The machine has an expected life of 7 years, a $27,000 estimated resale value, and falls under the MACRS 10-Year class life. Revenue from the new game is expected to be $320,000 per year, with costs of $120,000 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 $52,000 at the beginning of the project. What will be the net cash flow for year one of this project?

Explanation / Answer

Initial Investment = 42,000 + 5,200 = 47,200

Annual Depreciation = Investment / No. of years = 47,200 / 7 = $6,743

Cash Flows = (Sales - Costs - Depreciation) x (1 - tax rate)  + Depreciation

= (320,000 - 120,000 - 6743) x (1 - 40%) + 6743

= $122,697.14 is the net cash flow for year one.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.