Gateway Communications Is Considering a Project with an Initial Fixed

question 2

Multiple Choice

Gateway Communications is considering a project with an initial fixed asset cost of $2.168 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. Ignore bonus depreciation. At the end of the project the equipment will be sold for an estimated $495,000. The project will not directly produce any sales but will reduce operating costs by $634,000 a year. The tax rate is 21 percent. The project will require $128,000 of net working capital which will be recouped when the project ends. What is the net present value at the required rate of return of 14.3 percent?

• A) $668,019.24
• B) $701,414.14
• C) $652,108.10
• D) $570,475.57
• E) $657,345.35

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Definitions:

External Costs

Costs incurred by someone who does not participate directly in a transaction or activity, often relating to environmental or societal impacts.

Socially Optimal

A condition or point at which the total benefits to society are maximized, often considered in the context of production or distribution of goods and services.

Negative Externality

A cost that affects a party who did not choose to incur that cost, often seen in environmental pollution where the public bears the cost not reflected in the market price.

Lawn Mowing

Lawn mowing refers to the act of cutting or trimming the grass in a lawn to maintain its appearance and health, often performed as a routine landscaping activity.