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

question 19

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.The corporate tax rate is 30% and the cost of capital is 16.5%.Calculate the NPV of the project.

• A)$5,648
• B)$3,840
• C)-$2,735
• D)$4,848

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Definitions:

Income

Income is the financial gain or revenue received by an individual, company, or entity, typically through work, investment, or business ventures.

Resource Market

A marketplace where productive resources (like labor, capital, and raw materials) are bought and sold.

Product Market

A Product Market is a marketplace where final goods or services are offered to consumers, businesses, and the public sector.

Circular Flow Model

An economic model that describes the movement of money, goods and services, and resources between producers and consumers in the economy.