Your company has spent $200,000 on research to develop a new computer game. The firm is planning to spend $40,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,000. The machine has an expected life of five years, a $25,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $300,000 per year, with costs of $100,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 14 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will be the operating cash flow for year one of this project? Multiple Choice $3,150 -$49,150

Your company has spent $200,000 on research to develop a new computer game. The firm is planning to spend $40,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,000. The machine has an expected life of five years, a $25,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $300,000 per year, with costs of $100,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 14 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will be the operating cash flow for year one of this project? Multiple Choice $3,150 -$49,150

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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ACE Ltd is evaluating whether it should invest in a machine that costs $100,000. The machine would be fully depreciated over ten years to zero value using the straight-line depreciation method. With the new machine, the firm projects that it will be able to generate an additional $20,000 annually in sales revenue and additional $10,000 cost annually. The firm would also need an additional net working capital of $40,000. Given the firm’s cost of capital is 10% and tax rate of 20%, calculate annual operating cash flow (OCF) of the investment.
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