Your company has spent $1,000,000 on research to develop a new computer game. Th

Question

Your company has spent $1,000,000 on research to develop a new computer game. The firm is planning to spend $500,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $75,000. The machine has an expected life of 3 years, a $100,000 estimated resale value, and falls under the MACRS 5-Year class life. Revenue from the new game is expected to be $2,000,000 per year, with costs of $800,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $300,000 at the beginning of the project. What will be the net cash flow for year one of this project?

Explanation / Answer

Sales-Costs $ 1,200,000.00 Less: Depreciation $      115,000.00 Profit before tax $ 1,085,000.00 Less: Tax@35% $      379,750.00 Profit after tax $      705,250.00 Add: Depreciation $      115,000.00 Net cash flows in year 1 $      820,250.00

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