Tony's Pizza Is Considering a New Project That It Considers

question 228

Multiple Choice

Tony's Pizza is considering a new project that it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 2 % to their company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $42,000 and projected cash inflows of $15,000 in year one, $25,000 in year two, and $12,000 in year three. The firm uses 35 % debt and 65 % common stock as their capital structure. The company's cost of equity is 13 % while the after-tax cost of debt for the firm is 6 %. What is the projected net present value of the new project?

• A) -$520.29
• B) -$127.08
• C) $26.18
• D) $413.39
• E) $906.49

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Definitions:

Bank

A financial institution that accepts deposits, offers loans, and provides other financial services.

Average Daily Receipts

The average amount of cash flow received by a business per day over a defined period of time.

Collection Delay

The time lag between when a sale is made and when the payment is actually received, affecting cash flow.

Average Amount

The sum of individual amounts divided by the number of amounts, representing a central value or typical amount in a set of data.