A Five-Year Project Requires an Additional Commitment of $100,000 in Net

question 112

Multiple Choice

A five-year project requires an additional commitment of $100,000 in net working capital.What is the present value opportunity cost associated with this investment?

• A)$100,000
• B)The present value of $100,000, discounted at the firm's cost of capital
• C)The value of $100,000, netted against the discounted present value of the $100,000 of working capital returned at the end of the project
• D)No opportunity cost is involved

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Definitions:

Fixed Expenses

These are costs that do not change with the level of production or sales, such as rent, salaries, and insurance.

Return On Investment

A measure used to evaluate the efficiency of an investment or compare the efficiencies of several different investments.

Residual Income

The amount of income that an entity has after all costs and expenses, including the cost of capital, have been deducted.

Return On Investment

A measure of the profitability of an investment, calculated by dividing the gain from the investment by the cost of the investment.