Your Company Is Considering a Machine Which Will Cost R50,000

question 31

Multiple Choice

Your company is considering a machine which will cost R50,000 at Time 0 and which can be sold after 3 years for R10,000.R12,000 must be invested at Time 0 in inventories and receivables; these funds will be recovered when the operation is closed at the end of Year 3.The facility will produce sales revenues of R50,000/year for 3 years; variable operating costs (excluding depreciation) will be 40 percent of sales.No fixed costs will be incurred.Operating cash inflows will begin 1 year from today (at t = 1) .By an act of Congress, the machine will have depreciation expenses of R40,000, R5,000, and R5,000 in Years 1, 2, and 3 respectively.The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund on this project if the project's income is negative, and a 15 percent required rate of return.Inflation is zero.What is the project's NPV?

• A) R7,673.71
• B) R12,851.75
• C) R17,436.84
• D) R24,989.67
• E) R32,784.25

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Definitions:

Compounded Monthly

Describes interest on an investment or loan that is calculated and added to the principal balance monthly, allowing for the interest to earn interest.

Guaranteed Investment Certificate

A secure investment that guarantees to return the principal amount along with a fixed rate of interest at the end of the investment term.

Interest

The cost of borrowing money, calculated as a percentage of the total amount borrowed.

Compounded Annually

Refers to the process of earning interest on both the initial principal and the accumulated interest from previous periods on a deposit or loan.