Bertelli's Is Analyzing a Project with an Initial Cost of $55,000

question 299

Multiple Choice

Bertelli's is analyzing a project with an initial cost of $55,000 and cash inflows of $33,000 a year for two years. This project is an extension of the firm's current operations and thus is equally as risky as
The current firm. The firm uses only debt and common stock to finance their operations and
Maintains a debt-equity ratio of .35. The after-tax cost of debt is 6 percent and the cost of equity is
11 percent. The tax rate is 34 percent. What is the projected net present value of this project?

• A) $2,501
• B) $2,854
• C) $2,913
• D) $3,011
• E) $3,418

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Definitions:

Opportunity Cost

The cost of an alternative that must be forgone in order to pursue a certain action, essentially the benefits you could have received by taking another course of action.

EVA

Economic Value Added, a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit.

Operating Income

This metric reflects the profits earned from a company's core business operations, excluding non-operating income and expenses.

Cost Of Capital

The essential return rate an enterprise has to produce on its investment activities to sustain its market assessment and appeal to investors.