Apricot, Inc. has spent $400,000 on research to develop a new computer game. The
ID: 2656851 • Letter: A
Question
Apricot, Inc. has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of 3 years, a $75,000 estimated resale value, and falls under the MACRS 7-Year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the cash flows for this project be?
Explanation / Answer
Cash flows :
Year 0:
Research cost $400,000
Cost of new game $200,000
Shipping and installation cost $50,000
Working capital $100,000
Year 1:
Revenue $600,000
Costs $250,000
Depreciation expense
Year 2:
Revenue $600,000
Costs $250,000
Depreciation expense
Year 3:
Revenue $600,000
Costs $250,000
Depreciation expense
Salvage value $75,000
Working capital $100,000
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