An All-Equity Firm Is Analyzing a Potential Project Which Will

question 171

Multiple Choice

An all-equity firm is analyzing a potential project which will require an initial,after-tax cash outlay of $50,000 and after-tax cash inflows of $6,000 per year for 10 years.In addition,this project will have an after-tax salvage value of $10,000 at the end of Year 10.If the risk-free rate is 6 percent,the return on an average stock is 10 percent,and the beta of this project is 1.50,then what is the project's NPV?

• A) $13,210
• B) $4,905
• C) $7,121
• D) −$6,158
• E) −$12,879

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Definitions:

Useful Life

The estimated duration for which an asset is expected to be functional and economically viable for its intended purpose.

Periodic Depreciation

The allocation of an asset's cost over its useful life, recognized as an expense on the income statement at regular intervals, typically annually.

Cost Allocation

The process of identifying, aggregating, and assigning costs to cost objects, such as products, departments, or projects.

Units-Of-Output Method

A depreciation method where the expense amount is based on the units of production or use of the asset during the period.