You Are Considering a Project Which Has Been Assigned a Discount

question 46

Multiple Choice

You are considering a project which has been assigned a discount rate of 8%. If you start the project today,you will incur an initial cost of $480 and will receive cash inflows of $350 a year for three years. If you wait one year to start the project,the initial cost will rise to $520 and the cash flows will increase to $385 a year for three years. What is the value of the option to wait?

• A) $15.23
• B) $17.08
• C) $18.67
• D) $20.20
• E) $50.20

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Definitions:

Inventory

Assets that are held for sale in the ordinary course of business, or in the process of being produced for such sale, or in the form of materials to be consumed in the production process.

Sole Proprietor

An individual who owns and operates a business by themselves, without forming a corporation or a partnership, bearing full responsibility for the business's debts and obligations.

Schedule C

A form used by self-employed individuals or sole proprietors to report their business income and expenses to the IRS.

Ordinary Gain

Ordinary gain refers to the profit that arises from the sale of an asset or property, which is taxable at standard income tax rates.