Suppose a Seven-Year Project Requires an Initial Capital Investment of $475,000

question 125

Multiple Choice

Suppose a seven-year project requires an initial capital investment of $475,000 and an initial net working capital investment of $25,000.The project is expected to provide operating revenue of $350,000 per year.The associated operating costs are expected to be $150,000 per year.The capital asset belongs to Class 8 and has a CCA rate of 20%.The asset is expected to sell for $36,000 when the project ends.Assume the asset class remains open after the asset is sold and the accelerated investment incentive is applicable for CCA in year 1.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 operating costs increase by 5%?

• A)NPV decreases by 8.22%
• B)NPV decreases by 7.94%
• C)NPV increases by 8.22%
• D)NPV increases by 7.94%

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Definitions:

Classical Management Strategy

A set of principles for managing organizations that emphasizes planning, organizing, leading, and controlling.

Horizontal Communication

The exchange of information between individuals or units of an organization at the same hierarchical level, aimed at coordination and collaboration.

Organizational Structure

The system used to define a hierarchy within an organization, specifying roles, responsibilities, and the flow of information.

External Uncertainty

The unpredictability in an organization's external environment that can affect its operations and performance, including economic, social, and political factors.