A Project Requires an Initial Investment in Equipment of $90,000

question 44

Multiple Choice

A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0) . You expect the project to produce sales revenue of $120,000 per year for three years. You estimate manufacturing costs at 60 percent of revenues. (Assume all revenues and costs occur at year-end, i.e., t = 1, t = 2, and t = 3) . The equipment depreciates using straight-line depreciation over three years. At the end of the project, the firm can sell the equipment for $10,000 and also recover the investment in net working capital. The corporate tax rate is 21 percent and the cost of capital is 15 percent. Cash flows from the project are

• A)CF₀: −90,000;CF₁: 12,600; CF₂: 12,600; CF₃: 29,600.
• B)CF₀: −100,000; CF₁: 44,220; CF₂: 44,220; CF₃: 62,120.
• C)CF₀: −100,000; CF₁: 42,600; CF₂: 42,600; CF₃: 42,600.
• D)CF₀: −100,000; CF₁: 42,600; CF₂: 42,600; CF₃: 49,600.

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