Road Hawk Inc

question 107

Multiple Choice

Road Hawk Inc.is adding a new production line that will cost $720,000.The line will be depreciated on a straight- line basis over a 7-year period and will generate net cash flows of $160,000 in each of the 7 years.At the end of the project, it is expected the line can be sold as scrap for $10,000.If the firm's marginal tax rate is 40% and its required rate of return is 14 percent, what is the net present value of this project?

• A)$70,091
• B)-$27,920
• C)$64,091
• D)-$31,520

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Definitions:

Net Present Value

A method used in capital budgeting to assess the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows.

Average Rate of Return

A monetary measurement for assessing an investment's profit efficiency, determined by dividing the yearly average profit by the cost of initial investment.

Cash Payback

A capital budgeting method that estimates the time required for an investment to generate cash flows sufficient to recover its initial cost.

Internal Rate of Return

A financial metric used in capital budgeting to estimate the profitability of potential investments, calculated as the discount rate that makes the net present value of all cash flows from a particular project equal to zero.