A Project Requires an Initial Investment in Equipment of $90,000

question 49

Multiple Choice

A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0) . The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be
60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. What would the NPV of the project be if the revenues were higher by
10% and the costs were 65% of the revenues?

• A) $8443
• B) $964
• C) $5566
• D) None of the above

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Definitions:

Actual Return

The real profit or loss generated on an investment over a specific period, reflecting the difference between the ending value and the beginning value, adjusted for dividends and interest.

Plan Assets

Assets set aside in a separate fund by an employer to pay pension benefits, typically including investments in stocks, bonds, and other securities.

Economic Status

Economic Status refers to the position of an individual, group, or country in terms of financial and resource aspects, influencing living standards and opportunities.

Fair Value

An estimation of the market value of an asset or liability based on the current market prices or valuations of similar assets and liabilities.