Foley Systems Is Considering a New Investment Whose Data Are

question 62

Multiple Choice

Foley Systems is considering a new investment whose data are shown below.The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require some additional working capital that 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 life.What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 3.)
WACC 10.0%
Net investment in fixed assets (basis) $75,000
Required net operating working capital $15,000
Straight-line depreciation rate 33.333%
Annual sales revenues $75,000
Annual operating costs (excl. depreciation) $25,000
Tax rate 35.0%

• A)$23,852
• B)$25,045
• C)$26,297
• D)$27,612
• E)$28,993

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Definitions:

Discount Rate

This is the rate used during discounted cash flow analysis for evaluating the present value of cash flows anticipated in the future.

Financial Break-even Point

It is the level of revenue necessary to cover a company’s fixed and variable costs, without generating profit or loss.

Degree of Operating Leverage

A financial metric that measures the sensitivity of a company's operating income to changes in its sales, highlighting the effect of fixed costs on profits.

Conventional Cash Flows

Conventional cash flows involve an initial outlay followed by a series of positive cash inflows, typically seen in standard investment scenarios.