Ernst Is Analyzing a Project and Has Determined That the Initial

question 26

Multiple Choice

Ernst is analyzing a project and has determined that the initial cost will be $423,000 and the required rate of return needs to be 16 percent.The project has a 2 percent chance of success and a 98 percent chance of failure.If the project fails,it will generate an annual cash flow of -$131,000.If the project succeeds,the annual cash flow will be $789,000.He has further determined that if the project is a failure,he can shut it down after the first two years but will not be able to recover any of his investment.If however,the project is a success,he can expand it after the second year with no additional investment and increase the cash flow to $1,020,000 a year for Years 3 and 4.At the end of Year 4,the project would be terminated and have no salvage value.What is the net present value of this project at Time 0?

• A)$1,850,050.32
• B)$49,666.71
• C)-$238,212.04
• D)$898,003.01
• E)-$579,412.95

---

Definitions:

Cash Flows

The cumulative total of cash inflows and outflows in a company, influencing its liquid assets.

Revenue

The total amount of income generated by the sale of goods or services related to a company's primary operations.

Income Statement

A financial statement that shows a company's revenues, expenses, and net income over a specific period.

Retail Company

A business entity that sells goods or commodities directly to consumers through various channels of distribution to earn a profit.