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:

Test Statistic

A calculated value used in statistical hypothesis testing to determine whether to reject the null hypothesis.

Squares

In statistics, refers to the process of squaring each difference between individual data points and the mean, used in the calculation of variance and standard deviation.

One-Way ANOVA

A statistical test that compares the means of three or more independent groups to determine if there is a statistically significant difference between them, based on one independent variable.

Critical Value

A point on the scale of a test statistic beyond which we reject the null hypothesis; it marks the boundary for deciding whether an observed test statistic is extreme.