Question

Your company is planning to spend $70,000 on a machine to produce a new computer game. Shipping and installation costs of the machine will be $3,000. 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 $32,000 per year, with costs of $17,000 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 $3,000 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.