Use the Information to Answer the Following Question(s)

question 2

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 IRR of the Velo Rapid Revolutions expansion?

• A) 14.4%
• B) 10.3%
• C) 12.0%
• D) 8.6%

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Taking Seriously

The act of giving earnest attention or consideration to someone or something, recognizing its importance or validity.

DSM-5

The Diagnostic and Statistical Manual of Mental Disorders, 5th Edition, a handbook used by healthcare professionals as a guide to diagnose mental disorders.

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A severe mental disorder characterized by disturbances in thought, perception, and behavior, leading to hallucinations, delusions, and cognitive impairments.

Stress

The physical or emotional response to demands or pressures that may feel overwhelming or challenging to manage.