Use the Information to Answer the Following Question(s)

question 35

Multiple Choice

Use the information to answer the following question(s) .
The Velo Rapid Revolutions Inc., a company that produces bicycles, elliptical trainers, scooters and other wheeled non-motorized recreational equipment, is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of €1,200,000 and additional installation of €300,000 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset) . Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by €600,000 per year over current levels for the next 5 years, however; expenses will also increase by €200,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal, and that the terminal value of the project in year 5 may change total after-tax cash flows for that year.) The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for €500,000. The firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment, and the initial investment (at year 0) also requires an increase in NWC of €100,000 (to be recovered at the sale of the equipment at the end of five years) . The current spot rate is $0.95/euro, and the expected inflation rate in the U.S. is 4% per year and 3% per year in Europe.
-Refer to Instruction 18.1. What is the initial investment for the Velo Rapid Revolutions project?

• A) $1,500,000
• B) €1,600,000
• C) $1,600,000
• D) €1,500,000

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Definitions:

Rising Incomes

An economic condition where individuals or populations experience an increase in their disposable income, often leading to changes in spending habits and economic growth.

Cost of Lumber

The expense associated with purchasing wood used for construction and manufacturing, which can vary based on supply and demand.

Demand

The quantity of a good or service that consumers are willing and able to purchase at various price levels at a given point in time.

Supply

The total amount of a good or service available for purchase at any given price level within a defined market.