Use the Information for the Question(s)below

question 29

Multiple Choice

Use the information for the question(s) below.
Kinston Industries has come up with a new mountain bike prototype and is ready to go ahead with pilot production and test marketing.The pilot production and test marketing phase will last for one year and cost $500,000.Your management team believes that there is a 50% chance that the test marketing will be successful and that there will be sufficient demand for the new mountain bike.If the test-marketing phase is successful,then Kinston Industries will invest $3 million in year one to build a plant that will generate expected annual after-tax cash flows of $400,000 in perpetuity beginning in year two.If the test marketing is not successful,Kinston can still go ahead and build the new plant,but the expected annual after-tax cash flows would be only $200,000 in perpetuity beginning in year two.Kinston has the option to stop the project at any time and sell the prototype mountain bike to an overseas competitor for $300,000.Kinston's cost of capital is 10%.
-Assuming that Kinston has the ability to sell the prototype in year one for $300,000,the NPV of the Kinston Industries Mountain Bike Project is closest to:

• A)$90,000.
• B)$590,000.
• C)$455,000.
• D)-$45,000.

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Definitions:

Primarily Personal

Describes expenses or activities mainly for individual or non-business purposes.

Personal/Rental

Pertaining to property that is used for personal purposes at times and rented out at others, often affecting tax implications.

Schedule E

Schedule E is a form used for tax filing that reports supplemental income and loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests.

Schedule D

A form used with the U.S. federal income tax return to report capital gains and losses from the sale, exchange, or disposition of capital assets.