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 35 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?

Question

Quizplus · Accepted Answer

The operating cash flow for year one can be calculated using the following formula:
Operating cash flow = (revenue - cost - depreciation) × (1 - tax rate) + depreciation
Revenue = $300,000
Cost = $100,000
Depreciation = $9,000 (($40,000 - $25,000) / 5)
Tax rate = 35%
Therefore, operating cash flow = ($300,000 - $100,000 - $9,000) × (1 - 0.35) + $9,000 = $133,150. 
Hence, the correct answer is option D.

Your Company Has Spent $200,000 on Research to Develop a New