A Project Will Increase the Sales of Joe's Workshop by $50,000

question 307

Multiple Choice

A project will increase the sales of Joe's Workshop by $50,000 and increase cash expenses by $36,000. The project will cost $30,000 and be depreciated using straight-line depreciation to a zero book value over the 3-year life of the project. The company has a marginal tax rate of 35%. What is the operating cash flow of the project using the tax shield approach?

• A) $8,400
• B) $9,100
• C) $12,600
• D) $15,600
• E) $17,500

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Definitions:

Systematic Factors

External influences that affect all companies in the market to some extent, such as economic, political, and social changes.

Industrial Production

An economic indicator that measures the level of output in the manufacturing, mining, electric, and gas industries.

Long-term Interest Rates

Interest rates on loan agreements or debt instruments, like bonds, which are due in more than one year.

Market Risk Premium

The additional return expected by investors for taking on the risk of investing in the stock market over a risk-free asset.