Your company hes spent $230,000 on research to develop a new computer game. The

Question

Your company hes spent $230,000 on research to develop a new computer game. The firm is planning to spend $43,000 on a machine to produce the new game. Shipping and instalation costs of the machine will be capitalized and depreciated, they total $5.300 The machine hes an expected life of 10 years, a $28,000 estimated resale value, and falls under the MACRS 15-Year class life. Revenue fom the new game is expected to be $330,000 per year, with costs of $130000 per year. The firm has a tax rate of 35 percent, an opportunty cost of capital of 12 percent and it expects net working capital to increase by $53,000 at the beginning of the project. What will be the net cash flow for year one of this project? $130,845 $130,000 O $845 -$49,145

Explanation / Answer

Calculation of net cash flow for Year one of the project Year 1 Revenue $330,000 Less : Costs $130,000 Less : Depreciation $2,415 Profit before tax $197,585 Less : Tax @ 35% $69,155 Add : Depreciation $2,415 Net Cash flow for Year One $130,845 The answer is $1,30,845. Calculation of depreciation for 1st Year using MACRS 15 year rate Depreciation for 1st Year = Capitalised cost machine * Depreciation rate for 1st year Capitalised cost of machine = $43000 + $5300 = $48,300 Depreciation rate for 1st year = 5% Depreciation for 1st Year = $48300 * 5% = $2415

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