Last Month, Standard Systems Analyzed the Project Whose Cash Flows

question 30

Multiple Choice

Last month, Standard Systems analyzed the project whose cash flows are shown below.However, before the decision to accept or reject the project took place, the Federal Reserve changed interest rates and therefore the firm's cost of capital (r) .The Fed's action did not affect the forecasted cash flows.By how much did the change in the r affect the project's forecasted NPV? Note that a project's expected NPV can be negative, in which case it should be rejected. $$\begin{array} { l c c c c } \text { Old r: } & 10.00 \% & \text { New r: } & 11.25 \% \\\text { Year } & 0 & 1 & 2 & 3 \\\hline \text { Cash flows } & - \$ 1,000 & \$ 410 & \$ 410 & \$ 410\end{array}$$

• A) ?$18.89
• B) ?$19.88
• C) ?$20.93
• D) ?$22.03
• E) ?$23.13

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Definitions:

Revenue Recognized

The point at which a company records the revenues it has earned in its financial statements, according to specific criteria outlining when the earnings process is considered complete.

Sustainable Income

The portion of earnings that can be consistently generated and expected to continue in the future, excluding any unusual or one-time profits or losses.

Transitory Income

Income that is not expected to recur regularly, often affecting financial analysis due to its non-permanent nature.

Earned Income

Income derived from active participation in a business or trade, including wages, salaries, tips, and other compensation for services rendered.