You Are Evaluating a Project for Your Company

question 32

Multiple Choice

You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $10,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 15 percent. What change in NWC occurs at the end of year 1?

• A) $11,550
• B) $14,875
• C) $17,500
• D) $23,167

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Definitions:

Inborn Knowledge

The idea that certain understandings or abilities are present in individuals from birth, not acquired through experience.

Evolutionary Psychology

A branch of psychology that seeks to explain humans' mental and psychological traits as a result of evolutionary adaptations.

Common Biology

The study of biological principles and phenomena that are universally applicable to living organisms.

Evolutionary History

The branching process by which different species evolve from their common ancestors over geological time scales.