KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $150,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 0 free cash flow for this project be?

Question

Quizplus · Accepted Answer

The year 0 free cash flow for this project is calculated by adding up all initial outflows. This includes the $400,000 spent on research, $150,000 for the machine, $50,000 for shipping and installation, and the $100,000 increase in net working capital, totaling $700,000. However, the question asks for the free cash flow, which is the net outflow, so we subtract any inflows (of which there are none mentioned at year 0). Thus, the total outflow is $700,000, but none of the provided options match this calculation. Given the options, the closest incorrect choice provided is −$300,000, but it's important to note the actual calculation error in the provided options.

KADS, Inc, Has Spent $400,000 on Research to Develop a New