Use the Information for the Question(s)below

question 39

Multiple Choice

Use the information for the question(s) below.
Boulderado has come up with a new composite snowboard.Development will take Boulderado four years and cost $250,000 per year,with the first of the four equal investments payable today upon acceptance of the project.Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years.Boulderado's discount rate is 10%.
-Calculate the IRR for the snowboard project and use it to determine the maximum deviation allowable in the cost of capital estimate that leaves the investment decision unchanged.The maximum deviation allowable is closest to:

• A)11.0%.
• B)0.0%.
• C)2.5%.
• D)1.0%.

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Definitions:

Capital Structure

The mix of different forms of funds used by a company to finance its overall operations and growth, including debt, equity, and hybrid instruments.

Equity Financing

The process of raising capital through the sale of shares in a company to investors.

Du Pont Identity

A formula that breaks down Return on Equity (ROE) into three component parts: profit margin, asset turnover, and financial leverage, to analyze a company’s financial performance.

Profit Margin

A fiscal indicator calculating the proportion of income left once total costs are subtracted from revenues.