Recently,DB Miller & Co

question 32

Multiple Choice

Recently,DB Miller & Co.implemented a positive NPV project.The project has a projected life of 4 years and an estimated rate of return of 14 percent.The project can be expanded by simply incurring additional variable costs or shut down without incurring any penalties or additional costs.Today,the government ruled that projects of this type are now subject to a new per unit tax,the total cost of which will exceed the projected NPV.The most logical move for the company would be to

• A)continue the project as planned since the NPV was positive and the project has been implemented.
• B)suspend the project until the following year to allow the company time to absorb the additional cost.
• C)double the size of the project as soon as it is feasible to do so.
• D)end the project immediately unless the additional tax can be passed on to Miller & Co.customers.
• E)decrease the required return on the project so the NPV can remain positive given the additional cost.

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Definitions:

Negotiable Instrument

A document that promises to pay a certain sum of money, which can be demanded at any time or on a fixed date, and allows the beneficiary to transfer this right to someone else.

Commercial Paper

An unsecured, short-term debt instrument issued by corporations, typically used for financing immediate needs.

Payment

The transfer of money, goods, or services as compensation or fulfillment of an obligation.

Demand Instrument

A type of draft that allows the payee to demand payment at any time from a holder.