Gateway Communications Is Considering a Project with an Initial Fixed

question 91

Multiple Choice

Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project.At the end of the project the equipment will be sold for an estimated $300,000.The project will not directly produce any sales but will reduce operating costs by $725,000 a year.The tax rate is 35 percent.The project will require $45,000 of inventory which will be recouped when the project ends.Should this project be implemented if the firm requires a 14 percent rate of return? Why or why not?

• A)No; The NPV is -$172,937.49.
• B)No; The NPV is -$87,820.48.
• C)Yes; The NPV is $251,860.34.
• D)Yes; The NPV is $387,516.67.
• E)Yes; The NPV is $466,940.57.

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Definitions:

Assigns

Individuals or entities to which rights or property are legally transferred or passed on.

Satisfactory Performance

The degree to which a task, responsibility, or duty is completed adequately or meets the expected standards.

Express Condition

A clearly stated, specific condition in a contract that must be met for the performance or continuation of that contract to be required.

Implied Condition

A condition in a contract that is not explicitly stated but is necessary for the performance of the contract.