A Capacity Alternative Has an Initial Cost of $30,000 and Cash

question 107

Multiple Choice

A capacity alternative has an initial cost of $30,000 and cash flow of $20,000 for each of the next four years. If the cost of capital (i.e., interest rate) is 5 percent, the net present value of this investment is:

• A) greater than $80,000 but less than $110,000.
• B) greater than $110,000.
• C) less than $50,000.
• D) greater than $50,000.
• E) impossible to calculate, because variable costs are not known.

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Definitions:

Portfolio Construction

The process of selecting and managing a collection of investments to meet long-term financial goals and risk tolerance.

Securities

Instruments evidencing ownership in a public corporation, a creditor's claim against a corporation or government body via bonds, or ownership entitlements through option contracts.

Financial Intermediaries

Entities such as banks, insurance companies, and investment firms that facilitate transactions between savers and borrowers by channeling funds from those who save to those who need to borrow.

Commercial Banks

Financial institutions that accept deposits from the public, offer various savings products, and provide loans including personal, mortgage, and business loans.