Your Company Is Considering a Machine Which Will Cost $50,000

question 84

Multiple Choice

Your company is considering a machine which will cost $50,000 at Time 0 and which can be sold after 3 years for $10,000.$12,000 must be invested at Time 0 in inventories and receivables;these funds will be recovered when the operation is closed at the end of Year 3.The facility will produce sales revenues of $50,000/year for 3 years;variable operating costs (excluding depreciation) will be 40 percent of sales.No fixed costs will be incurred.Operating cash inflows will begin 1 year from today (at t = 1) .By an act of Congress,the machine will have depreciation expenses of $40,000,$5,000,and $5,000 in Years 1,2,and 3,respectively.The company has a 40 percent tax rate,enough taxable income from other assets to enable it to get a tax refund on this project if the project's income is negative,and a 15 percent required rate of return.Inflation is zero.What is the project's NPV?

• A) $7,673.71
• B) $12,851.75
• C) $17,436.84
• D) $24,989.67
• E) $32,784.25

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Definitions:

Substitution

The economic principle of replacing one input or good for another due to changes in prices or preferences.

Indifference Curve

A graph representing different combinations of goods or services among which a consumer is indifferent, showing preference levels.

Utility Function

A mathematical representation of a consumer’s preference, showing the amount of satisfaction or utility derived from consuming various bundles of goods and services.

Perfect Complements

Pair of goods that are consumed together in fixed proportions because the consumption of one good enhances the consumption of the other.