Question

Your company is planning to spend $50,000 on a machine to produce a new computer game. Shipping and installation costs of the machine will be $2,500. The machine has an expected life of 6 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 $39,000 per year, with costs of $13,000 per year. The firm has a tax rate of 30 percent, an opportunity cost of capital of 14 percent, and it expects net working capital to increase by $2,500 at the beginning of the project. What will be the operating cash flow (OCF) for year one of this project? The 5-year MACRS rates are: 20.00% for year 1; 32.00% for year 2; 19.20% for year 3; 11.52% for year 4; 11.52% for year 5; and 5.76% for year 6.

Answer 1

Time line		0	1
Cost of new machine		-52500
Initial working capital		-2500
=Initial Investment outlay		-55000
5 years MACR rate			20.00%
Sales			39000
Profits	Sales-variable cost		26000
-Depreciation	=Cost of machine*MACR%		-10500
=Pretax cash flows			15500
-taxes	=(Pretax cash flows)*(1-tax)		10850
+Depreciation			10500
=after tax operating cash flow			21350