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

question 10

Multiple Choice

KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $50,000 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 $10,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 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 $25,000 at the beginning of the project. What will the year 3 free cash flow for this project be?

• A)$222,600
• B)$197,400
• C)$212,200
• D)$243,300

---

Definitions:

1934 Act

Refers to the Securities Exchange Act of 1934, which governs the trading of securities in the U.S., aiming to protect investors against malpractice.

Willful Violations

Willful violations refer to deliberate or intentional breaches of a legal duty or regulation, often resulting in stricter penalties or damages.

Fine

A monetary penalty imposed as punishment for an offense or breach of law.

Penny Stock Reform Act

is legislation aimed at increasing transparency and protecting investors in the market for penny stocks, typically low-priced, speculative securities.