Question

Your company is planning to spend $75,000 on a machine to produce a new computer game. Shipping and installation costs of the machine will be $6,000. 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 $40,000 per year, with costs of $10,000 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 $2,000 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.

DO NOT USE DOLLAR SIGNS OR COMMAS IN YOUR ANSWER. ROUND TO THE NEAREST DOLLAR (e.g., 8000 NOT $8,000).

Answer 1

Operating Cashflows for Year-1
Revenues			40000
Less: Cost			10000
Less: Depreciation (81000*20%)			16200
Before tax income			13800
Less: tax @ 30%			4140
After Tax Income			9660
Add: Depreciation			16200
Annual cashflows			25860
Answer is OCF = $ 25860.