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:

Common Shareholders' Equity

The amount of money that would be returned to common shareholders if all of the assets were liquidated and all of the company's debts were paid off.

Preferred Dividends

Dividends that are paid to preferred shareholders before any are paid to common shareholders, often at a fixed rate.

Payout Ratio

A financial metric that measures the proportion of earnings a company pays to its shareholders in the form of dividends, typically expressed as a percentage.

Retained Earnings

Retained earnings refer to the cumulative amount of net income a company retains, rather than distributing it to shareholders as dividends.