Your Boss Asked You to Evaluate a Project with an Infinite

question 16

Multiple Choice

Your boss asked you to evaluate a project with an infinite life.Sales and costs project to $1,000 and $500 per year,respectively.(Assume sales and costs occur at the end of the year,i.e.,profit of $500 at the end of year one.) There is no depreciation and the tax rate is 30%.The real required rate of return is 10%.The inflation rate is 4% and is expected to be 4% forever.Sales and costs will increase at the rate of inflation.If the project costs $3,000,what is the NPV?

• A)$500.00
• B)$1629.62
• C)$365.38
• D)$472.22

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Definitions:

Average Total

The sum of all the costs of production (fixed and variable) divided by the total quantity produced; often referred to as average total cost.

Marginal Cost Curve

A graphical representation showing how the marginal cost varies with the quantity of output produced, typically U-shaped due to economies and diseconomies of scale.

Average Fixed Cost Curve

A graphical representation depicting how the average fixed costs of production change with different output levels.

Average Total Cost

The total cost of production (fixed and variable costs combined) divided by the number of units produced, indicating the cost per unit of output.