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

question 76

Multiple Choice

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?

• A) −$250,000
• B) −$150,000
• C) −$200,000
• D) −$300,000

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Definitions:

Regression Toward The Mean

The statistical phenomenon where extreme measurements or data points tend to be closer to the average upon subsequent measurements or in different samples.

Bowling Average

A statistical measure in the sport of bowling, calculated by dividing the total number of pins knocked down by the total number of games played.

Three-game Average

A statistical calculation used to determine a player's average performance over three games, often applied in sports to assess recent performance.

Unusually Low

Pertains to a value or level that is significantly below what is considered normal or typical.