Margarite's Enterprises Is Considering a New Project

question 94

Multiple Choice

Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed assets,$160,000 for additional inventory and $35,000 for additional accounts receivable. Short-term debt is expected to increase by $100,000 and long-term debt is expected to increase by $300,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project,the fixed assets can be sold for 25% of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 35% and the required rate of return is 15%. What is the initial cost of this project?

• A) $325,000
• B) $420,000
• C) $425,000
• D) $520,000
• E) $620,000

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Definitions:

Promissory Note

A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.

Compounded Semiannually

Interest calculation method where interest is added to the principal on a semiannual basis, leading to interest on interest in the second half of the year.

Quarterly Compounded

Interest calculation method where the accrued interest is added to the principal balance four times a year, allowing interest to be earned on interest.

Annual Rate of Return

The percentage of profit or loss on an investment over a one-year period.