Thomson Media Is Considering Some New Equipment Whose Data Are

question 61

Multiple Choice

Thomson Media is considering some new equipment whose data are shown below.The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down.Also, some new working capital would be required, but it would be recovered at the end of the project's life.Revenues and other operating costs are expected to be constant over the project's 3-year life.What is the project's NPV?
$$\begin{array} { | l | l | } \hline \text { WACC } & 10.0 \% \\\hline \text { Net investment in fixed assets (depreciable basis) } & \$ 70,000 \\\hline \text { Required net operating working capital } & \$ 10,000 \\\hline \text { Straight-line depreciation rate } & 33.333 \% \\\hline \text { Annual sales revenues } & \$ 57,000 \\\hline \text { Annual operating costs (excl. depreciation) } & \$ 30,000 \\\hline \text { Expected pre-tax salvage value } & \$ 5,000 \\\hline \text { Tax rate } & 35.0 \% \\\hline\end{array}$$

• A)$20,762
• B)$21,854
• C)$23,005
• D)$24,155
• E)$25,363

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Definitions:

Capital Deficiency

A situation where a company's current liabilities exceed its current assets, indicating potential financial distress.

Liquidation Process

The procedure of winding up a business's operations, selling off assets to pay creditors, and distributing any remaining assets to owners or shareholders.

Partnership Books

These are the accounting records that capture all financial transactions and the financial state of a partnership.

Income Ratio

A financial metric that compares different streams of income, often used to assess the profitability or efficiency of a business operation.