Suppose a Six-Year Project Requires an Initial Capital Investment of $425,000

question 21

Multiple Choice

Suppose a six-year project requires an initial capital investment of $425,000 and an initial net working capital investment of $50,000.The project is expected to provide operating revenue of $270,000 per year.The associated operating costs are expected to be $130,000 per year.The capital asset belongs to Class 9 and has a CCA rate of 30%.The asset is expected to sell for $40,000 when the project terminates.Assume the asset class remains open when the asset is sold and the half-year rule applies in the first year.The firm's marginal tax rate is 40% and cost of capital is 8%.What impact would it have on the project's NPV if the cost of capital were 10%?

• A)NPV decreases by 23.14%
• B)NPV decreases by 38.04%
• C)NPV decreases by 48.20%
• D)NPV decreases by 61.41%

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Definitions:

Marginal Revenue

The increased earnings obtained from the sale of one extra unit of a product or service.

Total Cost

The total of all costs associated with the creation of products or services, encompassing both fixed and variable expenses.

Marginal Cost

The financial outlay for generating an additional unit of a good or service.

Profit Maximizing Price

The price at which a company can sell its product to maximize its profit, balancing between too high to deter consumers and too low to cover costs.