A Project Requires an Initial fiXed Asset Investment of $600,000

question 174

Multiple Choice

A project requires an initial fixed asset investment of $600,000, which will be depreciated straight- line to zero over the six-year life of the project. The pre-tax salvage value of the fixed assets at the
End of the project is estimated to be $50,001. Projected sales volume for each year of the project is
Shown below. The sale price is $50 per unit for the first three years, and $45 per unit for years 4
Through 1. A $30,000 initial investment in net working capital is required, with additional
Investments equal to 7.5% of annual sales for each year of the project. Variable costs are $35 per
Unit, and fixed costs are $50,000 per year. The firm has a tax rate of 34% and a required return on
Investment of 12%. What are the additions to NWC during year 4 of the project?

• A) Use $4,125
• B) Use $7,323
• C) Use $65,917
• D) Recover $5,123
• E) Recover $16,342

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Definitions:

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