A Project Costs $91,000 Today and Is Expected to Generate

question 107

Multiple Choice

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8 percent. Should this project be accepted, and why?

• A) Yes, the project should be accepted since it has a NPV = $15,391.23.
• B) Yes, the project should be accepted since it has a NPV = $13,610.89.
• C) Yes, the project should be accepted since it has a NPV = $16,999.62.
• D) None of the options are correct.

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Definitions:

Indirect Materials

Materials used in the production process that do not become an integral part of the final product and are not directly assigned to specific units produced.

Direct Materials

Raw materials that are directly traceable to the manufacturing of a product and constitute an integral part of the finished product.

Manufacturing Overhead

Costs associated with the production process that are not directly traceable to a specific product, such as utilities and factory maintenance.

Cost of Goods Sold

The costs incurred directly from manufacturing the goods a company sells.