Geronimo, Inc

question 65

Multiple Choice

Geronimo, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Geronimo uses the net present value method and has a discount rate of 11%. Will Geronimo accept the project?

• A) Geronimo accepts the project because the NPV is greater than $10,000.00.
• B) Geronimo rejects the project because the NPV is about -$22,375.73.
• C) Geronimo rejects the project because the NPV is about -$12,375.60.
• D) Geronimo rejects the project because the NPV is about -$2,375.60.

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Definitions:

Compensating Balance

A minimum balance that must be maintained in a bank account, often required by banks in return for loans or as a condition for obtaining certain services.

Effective Annual Cost

This term refers to the total cost of borrowing on an annual basis, including interest and any fees, taking compounding into account.

Nominal Cost

The original cost of an asset or investment, not adjusted for inflation or other factors affecting its current value.

Trade Credit

An arrangement to buy goods or services on account, that is, without making immediate cash payment, usually evidenced by an invoice.