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

question 27

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

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

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Definitions:

Net Income

The net income of a company, calculated by removing all costs and taxes from the total sales.

Consolidated Income Statement

A financial statement that combines the income statements of a parent company and its subsidiaries, providing a comprehensive overview of the total income generated.

Operating

Relating to the day-to-day business activities involved in running a company, such as selling, managing, and producing goods or services.

Peripheral Activities

Operations or tasks that are not central to the main business or objectives of an organization, but may still generate revenue or provide support.