Suppose a Five-Year Project Requires an Initial Capital Investment of $600,000

question 83

Multiple Choice

Suppose a five-year project requires an initial capital investment of $600,000 and an initial net working capital investment of $30,000.The project is expected to provide operating revenue of $400,000 per year.The associated operating costs are expected to be $175,000 per year.The capital asset belongs to Class 7 and has a CCA rate of 15%.The asset is expected to sell for $168,000 when the project terminates.Assume the asset class remains open after the project ends and that the half-year rule applies in the first year.The firm's marginal tax rate is 40% and cost of capital is 10%.What impact would it have on the project's NPV if the operating revenue falls by 5%?

• A)NPV decreases by 21.85%
• B)NPV decreases by 38.84%
• C)NPV decreases by 46.19%
• D)NPV decreases by 63.51%

---

Definitions:

Joseph Wolpe

A South African psychiatrist known for developing systematic desensitization, a method used in behavior therapy to treat phobias and other anxiety disorders by gradually exposing the patient to the anxiety source.

Mary Cover Jones

An early psychologist known for her work in counter-conditioning, effectively using this technique to cure phobias.

Conditioned Response

the learned reaction to a conditioned stimulus that occurs as a result of previous conditioning.

Unconditioned Stimulus

A stimulus that naturally and automatically triggers a response without any need for learning or prior conditioning.