Lakeside Winery Is Considering Expanding Its Winemaking Operations

question 109

Multiple Choice

Lakeside Winery is considering expanding its winemaking operations.The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project.The equipment can be sold for $220,000 after the four years.The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project.The projected operating cash flow is $211,500 a year.What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 34 percent?

• A)-$7,632.77
• B)-$8,309.18
• C)-$10,747.11
• D)$7,008.14
• E)$1,309.54

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Definitions:

Nonsystematic Risk

The part of an investment's risk that is attributable to firm-specific or industry-specific factors and can be mitigated through diversification.

Volatility

A statistical measure of the dispersion of returns for a given security or market index, often used to quantify the risk of the security or market.

Sensitivity

The degree to which a financial asset's price responds to changes in underlying factors, such as interest rates or market volatility.

Systematic

Refers to the risk inherent to the entire market or market segment, which cannot be eliminated through diversification.