Your New Employer, Freeman Software, Is Considering a New Project

question 65

Multiple Choice

Your new employer, Freeman Software, is considering a new project whose data are shown below.The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4.Revenues and other operating costs are expected to be constant over the project's 10-year expected life.What is the Year 1 cash flow? $\begin{array}{lr}\text { Equipment cost (depreciable basis) } & \$ 65,000 \\\text { Sales revenues, each year } & \$ 60,000 \\\text { Operating costs (excl. deprec) } & \$ 25,000 \\\text { Tax rate } & 25.0 \%\end{array}$

• A) $31,666
• B) $31,849
• C) $33,442
• D) $35,114
• E) $36,869

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Definitions:

Optimal Capital

The best mix of debt, equity, and other financing sources to maximize a firm’s value while minimizing its cost of capital.

Swaps

Financial derivatives where two parties agree to exchange cash flows or other financial instruments for a set period of time.

Currency Swaps

Bilateral agreements to exchange periodic payments where the payments are based in two different currencies.

Financial Intermediary

An institution that facilitates the channeling of funds between lenders and borrowers indirectly.