A Project Requires an Initial Investment in Equipment of $90,000

question 14

Multiple Choice

A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0) .You expect the project to produce sales revenue of $120,000 per year for three years.You estimate manufacturing costs at 60% of revenues.(Assume all revenues and costs occur at year-end,i.e.,t = 1,t = 2,and t = 3.) The equipment depreciates using straight-line depreciation over three years.At the end of the project,the firm can sell the equipment for $10,000 and also recover the investment in net working capital.The corporate tax rate is 30% and the cost of capital is 15%.Calculate the NPV of the project:

• A)$3,840.
• B)$8,443.
• C)$-2,735.
• D)$7,342.

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Definitions:

Net Sales

This refers to the revenue generated from sales after deducting returns, allowances for damaged or missing goods, and discounts.

Accounts Receivable to Net Sales

A ratio that measures the amount of money owed to a company by its customers relative to the net sales.

Balance Sheet

A document detailing a firm's assets, liabilities, and owners' equity at a particular moment.

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period, revealing profit or loss.