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

cost = 500000+75000 = 575000

depreciation for year 1= 575000 *.20 = 115000

Income before tax = 2,000,000 - 800,000 - 115000 = 1085000

Income after tax = 1085000 (1 -.35 ) = 705250

Cash flow fo year 1 = 705250 + 115000(depreciation being non cash) = 820250

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