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

question 24

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%. Cash flows from the project are:

• A) CF0: -90,000; CF1: 12,600; CF2: 12,600; CF3: 29,600
• B) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 59,600
• C) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 42,600
• D) none of the above

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Definitions:

Empirical Returns

Returns on an investment that are based on observed, historical real-world data rather than theoretical or expected outcomes.

Conventional CAPM

The Capital Asset Pricing Model, a financial model that describes the relationship between systematic risk and expected return for assets, typically used for pricing risky securities.

Human Capital

The economic value of an individual's skill set and knowledge, which can contribute to their productivity and earnings.

Conditional CAPM

An extension of the Capital Asset Pricing Model that accounts for varying conditions over time or different market environments.