A Firm Has an Opportunity to Invest in a Project

question 95

Multiple Choice

A firm has an opportunity to invest in a project that will generate $55,000 per year for the next 10 years and requires an initial investment of $300,000.The firm will need to raise equity to pay for the project, but the flotation costs are 10% of the funds raised.If the firm's discount rate is 11%, should they invest in this project?

• A)Yes, since the NPV is approximately $23,900
• B)Yes, since the NPV is approximately $9,500
• C)No, since the NPV is approximately -$6,100
• D)No, since the NPV is approximately -$8,500 NPV = $55,000[1/.11 - (1/.11)(1.11)^-10] - $300,000= $23,908
• Flotation costs = .10 x ($300,000) = $30,000

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Definitions:

Variable Changes

Alterations in the value or status of variables within an experiment or study.

Correlation Coefficient

A numerical measure that describes the direction and degree of relationship between two variables, ranging from -1 to 1, where 0 indicates no linear relationship.

Numerical Index

A quantitative measure or indicator that represents statistical data points or trends.

Confounding Variable

A variable that influences both the dependent variable and independent variable, causing a spurious association.