Kottinger's Kamp Supplies Is Considering an Investment in New Manufacturing

question 337

Multiple Choice

Kottinger's Kamp Supplies is considering an investment in new manufacturing equipment. The equipment costs $220,000 and will provide annual after-tax inflows of $50,000 at the end of each
Of the next seven years. The firm's market value debt/equity ratio is 25%, its cost of equity is 14%,
And its pre-tax cost of debt is 7%. The flotation costs of debt and equity are 3% and 9%,
Respectively. The firm's combined marginal federal and provincial tax rate is 40%. Assume the
Project is of approximately the same risk as the firm's existing operations.
Ignoring flotation costs, what is the NPV of the proposed project?

• A) $6,297
• B) $7,899
• C) $9,156
• D) $13,436
• E) $15,984

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Definitions:

Duress

A broader term referring to the use of force, threats, or undue pressure by one party to compel another to act in a manner they would not ordinarily do.

Average Strength

Typically refers to the median level of force or power of an entity or substance, measured against a standard or amongst a range.

Fraud

Deliberate deception to secure unfair or unlawful gain, or to deprive a victim of a legal right.

Undue Influence

A form of manipulation that is used to persuade someone to act in a way that is not in their best interest, invalidating consent in contracts.