A New Asset Is Expected to Provide Service Over the Next

question 44

Multiple Choice

A new asset is expected to provide service over the next four years.It will cost $500,000,generates annual cash inflows of $150,000,and requires cash operating expenses of $30,000 each year.In addition,a $10,000 overhaul will be needed in year 3.If the company requires a 10% rate of return,the net present value of this machine would be:

• A)$(127,110),and the machine meets the company's rate-of-return requirement.
• B)$(127,110),and the machine does not meet the company's rate-of-return requirement.
• C)$(129,600),and the machine does not meet the company's rate-of-return requirement.
• D)$(151,700),and the machine meets the company's rate-of-return requirement.
• E)some other amount.

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Definitions:

Stock Price

The cost of purchasing a share of a company's stock, which fluctuates based on supply and demand in the marketplace.

Annual Dividend

The total amount of dividends a company pays out to its shareholders in one fiscal year.

Required Return

The minimum expected return by investors for investing in a non-risk-free asset, taking into account the risk associated with the investment.

Stock Payment

Compensation methods using shares of the company's stock, often employed in employee remuneration plans.