Your Boss Asked You to Evaluate a Project with an Infinite

question 52

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 percent.The real required rate of return is 10 percent.The inflation rate is 4 percent and is expected to be 4 percent 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)$1,629.62
• C)$365.38
• D)$472.22

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Definitions:

Proprietary Funds

Governmental accounting term for funds used by an organization that behaves like a private business, where the costs of providing goods or services to the public must be recovered through sales and fees.

Broad Classifications

Broad classifications refer to the general categories or groups used to organize similar entities, concepts, or items based on shared characteristics or functions.

Modified Accrual Accounting

An accounting method that combines elements of both accrual and cash basis accounting, recognizing revenues when they are available and measurable, and expenses when incurred.

Realizable

Refers to assets that can be easily converted into cash or are expected to be sold without significant delay or loss in value.