KADS, Inc. has spent $400,000 on research to develop a new computer game. The firm is planning to spend $250,000 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 3 years, a $75,000 estimated resale value, and falls under the MACRS 7-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 35 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 is -$400,000 because the firm has spent $400,000 on research and development, and will spend an additional $250,000 on a machine, plus $50,000 in shipping and installation costs. The net working capital will also increase by $100,000, so the total year 0 free cash flow is -$400,000 - $250,000 - $50,000 - $100,000 = -$800,000.

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