The Bakery Is Considering a New Project It Considers to Be

question 89

Multiple Choice

The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 1.2 percent to the company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $63,000 and projected cash inflows of $19,000 in Year 1, $34,000 in Year 2, and $28,000 in Year 3. The firm uses 33 percent debt and 67 percent common stock as its capital structure. The company's cost of equity is 13.8 percent while the aftertax cost of debt for the firm is 5.7 percent. What is the projected net present value of the new project?

• A) −$409
• B) $618
• C) −$308
• D) $427
• E) $573

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Definitions:

Fixed Expenses

Costs that do not fluctuate with the level of production or sales, such as rent, salaries, and insurance premiums.

Variable Expenses

Costs that change in proportion to the activity or volume of production in a business.

Variable Expense Ratio

The proportion of variable expenses to total sales, indicating how variable costs change with changes in sales volume.

Unit Contribution Margin

The difference between the selling price per unit and the variable cost per unit. This margin helps determine how each unit sold contributes to fixed costs and profits.