Question
Nintendo America is considering producing a new gaming system. This will be a two years project. New equipment will cost $5,000,000 and will be depreciated
Nintendo America is considering producing a new gaming system. This will be a two years project.
New equipment will cost $5,000,000 and will be depreciated on the straight-line basis to zero in 10 years.
The project requires an initial investment in net working capital of $750,000. The working capital will be recovered at the end of the projects' two-year life.
The new gaming system will directly generate $10,000,000 in revenues each year of the projects life.
In addition, the new gaming system will also decrease existing Wii revenues by $4,000,000 each year of the project's life.
The new project is estimated to have expenses of $1,500,000 each year.
At the conclusion of the project in two years, the equipment can be sold for $4,200,000.
There is no interest expense and the firms marginal tax rate is 20 percent.
1. Compute the initial investment (CFO) on this project.
2. What is the after tax salvage value of the equipment when you sell it in year 2?
3. What is the after tax operating cash flow in year 1?
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