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

question 37

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 percent 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 percent and the cost of capital is 15 percent.Cash flows from the project are

• A)CF₀: -90,000; CF₁: 12,600; CF₂: 12,600; CF₃: 29,600.
• B)CF₀: -100,000; CF₁: 42,600; CF₂: 42,600; CF₃: 59,600.
• C)CF₀: -100,000; CF₁: 42,600; CF₂: 42,600; CF₃: 42,600.
• D)CF₀: -100,000; CF₁: 42,600; CF₂: 42,600; CF₃: 49,600.

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Definitions:

Field Experiments

Research studies conducted in natural settings outside the laboratory to assess the effect of manipulated variables in a real-world environment.

Direct Control

The management or regulation of variables in an experiment to ensure that any observed effects are due to the manipulation of the independent variable.

Extraneous Variables

Variables that are not the focus of a study but could influence the results, potentially leading to confounding effects if not controlled.

Randomization

The process of randomly assigning subjects to different groups in a study, minimizing biases and ensuring variability.