Suppose a Five-Year Project Requires an Initial Capital Investment of $600,000

question 83

Multiple Choice

Suppose a five-year project requires an initial capital investment of $600,000 and an initial net working capital investment of $30,000.The project is expected to provide operating revenue of $400,000 per year.The associated operating costs are expected to be $175,000 per year.The capital asset belongs to Class 7 and has a CCA rate of 15 percent.The asset is expected to sell for $168,000 when the project terminates.Assume the asset class remains open after the project ends.The firm's marginal tax rate is 40 percent and cost of capital is 10 percent.What impact would it have on the project's NPV if the operating revenue falls by 5 percent?

• A) NPV decreases by 21.85%
• B) NPV decreases by 38.84%
• C) NPV decreases by 46.19%
• D) NPV decreases by 63.51%

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Definitions:

Data Latching

A technique used to read the value of the input data that will be operated on by the instructions with a function block.

Credit Risk

The possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations.

Bond Issuer

The entity, either a corporation or a government, that borrows funds by selling bonds and is obligated to pay interest on them as well as repay the principal amount at maturity.

Closed Economy

An economy that does not engage in international trade with other economies, neither importing nor exporting goods and services.