A Project Will Produce Operating Cash Flows of $45,000 a Year

question 59

Multiple Choice

A project will produce operating cash flows of $45,000 a year for four years. During the life of the project,inventory will be lowered by $30,000 and accounts receivable will increase by $15,000. Accounts payable will decrease by $10,000. The project requires the purchase of equipment at an initial cost of $120,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $25,000 after-tax cash flow. At the end of the project,net working capital will return to its normal level. What is the net present value of this project given a required return of 14%?

• A) $3,483.48
• B) $16,117.05
• C) $27,958.66
• D) $32,037.86
• E) $49,876.02

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Definitions:

Total Surplus

The combined benefit that both consumers and producers receive from a transaction, comprising consumer and producer surplus.

Consumer Surplus

The difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e., the market price).

Producer Surplus

The difference between what producers are willing to accept for a good or service versus what they actually receive, often reflecting gains from trade.

Tariff Revenue

Income generated by a government from imposing tariffs on imported goods.