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:

Net Present Value

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

Future Cash Flows

Projections of the money a business expects to receive and pay out over a future period, influencing decision-making and valuation.

Replacement Cost

The cost to replace an asset with another of similar nature and capacity at the current prices, without considering any physical deterioration or obsolescence.

Specialised Equipment

Machinery or devices designed for a particular purpose or industry, often requiring specific knowledge or skills to operate.