The Justus Center Is Analyzing a Project with an Initial

question 47

Multiple Choice

The Justus Center is analyzing a project with an initial cost of $197,000 and cash inflows of $65,000 a year for 4 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 its operations and
Maintains a debt-equity ratio of .55. The pre-tax cost of debt is 9 percent, the cost of equity is 14
Percent, and the tax rate is 35 percent. What is the net present value of this project?

• A) $4,194
• B) $7,807
• C) $9,911
• D) $12,407
• E) $16,873

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Definitions:

Compounding

The process of generating earnings on an asset's reinvested earnings, leading to exponential growth over time.

Present Value

The modern-day valuation of upcoming money amounts or cash flow sequences, adjusted according to a given rate of return.

Bank Account

A financial account maintained by a bank for a customer, allowing the customer to deposit and withdraw money and possibly earn interest.

Equal Payments

Installments of the same amount paid or received over a specified period for loans, mortgages, or annuities.