Question

• Your company has spent $240,000 on research to develop a new computer game. The firm is planning to spend $44,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,400. The machine has an expected life of 3 years, a $29,000 estimated resale value, and falls under the MACRS 5-year class life. Revenue from the new game is expected to be $340,000 per year, with costs of $140,000 per year. The firm has a tax rate of 30 percent, and opportunity cost of capital of 14 percent, and it expects net working capital to increase by $54,000 at the beginning of the project. What will be the net cash flow for year one of this project?

Answer 1

Cashflows for Year-1
Annual incremental revenue			340000
Less: Incremental cost			140000
Less: Annual depreciation			9880
(44000+5400)*20%
Net income before tax			190120
Less: tax @ 30%			57036
After tax Income			133084
Add: Depreciation			9880
Annual cashflows of Year-1			142964
Note: Initial investment of $49400 on machine and $ 54000 on Working capital shall be treated as cashflows of Year-0