A Project Costs $14 Million and Is Expected to Produce

question 44

Multiple Choice

A project costs $14 million and is expected to produce cash flows of $4 million per year for 15 years.The opportunity cost of capital is 20%.If the firm has to issue stock to undertake the project and issue costs are $1 million,what is the project's APV?

• A)$3.7 million
• B)$4.5 million
• C)$4.7 million
• D)$3.0 million

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Definitions:

Future Operating Loss

A projected loss from future operations, not yet incurred or realized, often considered in impairment assessments and going concern evaluations.

Deferred Liability

A liability that is recorded on the balance sheet and represents a future obligation to pay, such as taxes payable in the future.

Contingent Liability

A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the company's control.

Possible Obligation

A potential future outflow of resources embodying economic benefits, arising from past events, whose existence will be confirmed only by uncertain future events.