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

---

Definitions:

Numeraire

A unit of account or standard measure in economics used to compare the value of goods or services.

Pareto Optimal

Another term for Pareto Efficient; describes a situation where no one's condition can be improved without worsening someone else's condition.

Initial Endowment

The initial quantity of goods, services, and assets that an individual, organization, or economy possesses.

Pareto Optimal

An allocation of resources from which it is impossible to reallocate without making at least one individual worse off.