The Bakery Is Considering a New Project It Considers to Be

question 52

Multiple Choice

The Bakery is considering a new project it considers to be a little riskier than its current operations.Thus,management has decided to add an additional 1.5 percent to the company's overall cost of capital when evaluating this project.The project has an initial cash outlay of $58,000 and projected cash inflows of $17,000 in year one,$28,000 in year two,and $30,000 in year three.The firm uses 25 percent debt and 75 percent common stock as its capital structure.The company's cost of equity is 15.5 percent while the aftertax cost of debt for the firm is 6.1 percent.What is the projected net present value of the new project?

• A)-$6,208
• B)-$1,964
• C)-$308
• D)$1,427
• E)$1,573

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Definitions:

M1

A measure of the money supply that includes physical currency and coin, demand deposits, traveler's checks, and other checkable deposits.

M2

A measure of the money supply that includes cash and checking deposits (M1) as well as near money, such as savings deposits and money market securities.

Store of Value

An asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved.

Price Level

A measure of the average prices of goods and services in an economy, often used to assess inflation or deflation.