Foley Systems Is Considering a New Investment Whose Data Are

question 43

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 additional net operating 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 from operations are constant in Years 1 to 3. ) Do not round the intermediate calculations and round the final answer to the nearest whole number. $\begin{array}{lr}\text { WACC } & 10.0 \% \\\text { Net investment in fixed assets (basis) } & \$ 75,000 \\\text { Required net operating working capital } & \$ 15,000 \\\text { Straight-line depreciation rate } & 33.333 \% \\\text { Annual sales revenues } & \$ 56,000 \\\text { Annual operating costs (excl. depr.) } & \$ 25,000 \\\text { Tax rate } & 35.0 \%\end{array}$
?

• A) -$6,860
• B) -$7,615
• C) -$6,380
• D) -$7,683
• E) -$6,106

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Definitions:

Investing Activities

Financial transactions involving the purchase or sale of long-term assets and investments.

Net Cash

The amount of cash and cash equivalents minus any liabilities or financial obligations.

Cash Basis

An accounting method where revenues and expenses are recognized only when cash is exchanged.

Financing Activities

Transactions involving raising capital or repaying funds to and from investors and creditors, as reflected in the cash flow statement.