A Project Requires an Initial Investment of $69,000 for Equipment

question 77

Multiple Choice

A project requires an initial investment of $69,000 for equipment that will be depreciated using the straight-line method to zero over the project's 4-year life.The equipment can be sold for $15,000 at the end of the project.The project requires $8,700 in net working capital.The company expects to sell 31,000 units,±5 percent.The expected variable cost per unit is $12,and the expected fixed costs are $46,000.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $19 a unit,±2 percent.The discount rate is 14 percent,and the tax rate is 34 percent.What is the operating cash flow for a sensitivity analysis using total fixed costs of $45,000?

• A)$124,520
• B)$116,520
• C)$122,000
• D)$119,385
• E)$132,033

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Definitions:

Perfectly Matched Hedge

A hedging strategy that entirely eliminates the risk of a particular position by taking an offsetting position in the market.

Interest Rate Swap

A financial derivative contract in which two parties agree to exchange future interest rate payments, typically one fixed-rate and one variable-rate.

Fair Value

A financial term referring to the estimated market value of an asset, based on current market prices.

Available For Sale

A classification for financial assets indicating that they are neither held for trading purposes nor intended to be held to maturity, implying they can be sold to meet liquidity needs or strategic goals.