A Firm Is Considering a Project That Will Generate Perpetual

question 110

Multiple Choice

A firm is considering a project that will generate perpetual cash flows of $15,000 per year beginning next year. The project has the same risk as the firm's overall operations and must be financed externally. Equity costs 14% and debt costs 4% on an after-tax basis. The firm's D/E ratio is 0.8. What is the most the firm can pay for the project and still earn its required return?

• A) $138,000
• B) $157,000
• C) $164,000
• D) $182,000
• E) $199,000

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Definitions:

PERT

Program Evaluation and Review Technique, a project management tool used to schedule, organize, and coordinate tasks within a project.

CPM

Critical Path Method, a project management technique used to plan and control a project by identifying tasks, their durations, and dependencies to calculate the longest path of planned activities to the end of the project.

Beta Distribution

A continuous probability distribution characterized by two shape parameters, used in project planning and Bayesian statistics for modeling variable events.

Cost Estimates

The anticipated expenses involved in completing a project or producing a product, often used for budgeting and planning purposes.