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

question 6

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%.What is the NPV of the project if the revenues were higher by 10% and the costs were 65% of the revenues?

• A)$8,443
• B)$964
• C)$5,566
• D)$4,840

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