Thornley Machines Is Considering a 3-Year Project with an Initial

question 30

Multiple Choice

Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $60,000. The tax rate is 34%. The project will require $23,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a 9% rate of return? Why or why not?

• A) No; The NPV is -$2,646.00.
• B) Yes; The NPV is $27,354.00.
• C) Yes; The NPV is $32,593.78.
• D) Yes; The NPV is $43,106.54.
• E) Yes; The NPV is $196,884.40.

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Definitions:

Liabilities

Financial obligations or debts owed by a business to creditors, which must be settled over time through the transfer of assets, provision of services, or other economic benefits.

Assets

Resources owned by a company that have future economic value that can be measured and can be used to generate income.

Equity

The value of an owner’s interest in a property or a company, after all debts and liabilities have been deducted.

Income Statement

An income statement is a financial statement that shows a company's financial performance over a specific accounting period, highlighting revenue, expenses, and profit or loss.