The Atlantic Company Plans to Open a New Branch Office

question 32

Multiple Choice

The Atlantic Company plans to open a new branch office in a suburban area. The building will cost $200,000 and will be depreciated (on a straight-line basis) over a 20-year life to a $0 estimated salvage value. Equipment for the building will cost an additional $100,000. This equipment has a 20-year life and will be depreciated on a straight-line basis to a $0 estimated salvage value. The branch office is expected to generate additional before tax net income of $30,000 per year. The tax rate is 40%, and the cost of capital is 12%. Compute the net present value for the project.

• A) -$63,523
• B) +$246,477
• C) +$53,523
• D) -$53,523

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Definitions:

Repurchase

The action of a company buying back its own shares from the marketplace, reducing the amount of outstanding stock.

Initial Investment

The original sum of money or capital used to purchase assets or start an investment portfolio at the outset.

Short 150 Shares

The action of borrowing 150 shares of a stock with the aim of selling them in the hope that the stock price will decline, allowing for profit upon repurchasing the shares at a lower price.

Initial Margin

The portion of the purchase price that an investor must deposit when buying securities on margin, serving as a form of collateral.