Question

Capital Budgeting Exercise 2

Capital Budgeting Exercise 2
Your company has spent $200,000 on research to develop a new computer game. The firm is planning to spend $300,000 on a machine to produce the new game. Shipping andinstallation costs of the machine will be capitalized and depreciated; they total $25,000. The machine has an expected life of 3 years, a $50,000 estimated resalevalue, and falls under the MACRS 7-Year class life. Revenue from the new game is expected to be $400,000 per year, with costs of $150,000 per year. The firm has a taxrate of 35 percent, an opportunity cost of capital of 10 percent, and it expects net working capital to increase by $75,000 at the beginning of the project. Should youproceed with this project? Explain.
Year 0 1 2 3
Sales

Fixed Costs

Depreciation

EBIT

Taxes

Net Income

Operating
Cash Flow
Change in NWC
Change
In Fixed Assets
Total
Cash Flow

Should you proceed with this project? Explain.

Solutions

Expert Solution
No answers


Submit Your Answer