A Divisional Manager Submitted a Project Proposal to the Chief

question 24

Multiple Choice

A divisional manager submitted a project proposal to the chief financial officer,complete with a calculated NPV for the project.The chief financial officer studied the proposal and pointed out that the divisional manager had failed to account for a one-time increase in net working capital of $60,000 that will be required over the life of the seven-year project.Assuming the full value of net working capital will be recovered at the end of the project,how will the project's NPV change after making the chief financial officer's adjustment? Assume a discount rate of 9%.

• A) The NPV will decrease by $16,411.
• B) The NPV will decrease by $32,822.
• C) The NPV will decrease by $60,000.
• D) The NPV will not be affected.
• E) None of the above.

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Definitions:

Total Variable Cost

The sum of all costs that vary directly with the level of production or output.

Fixed Cost Per Unit

The total fixed costs of production divided by the number of units produced, decreasing as production volume increases.

Relevant Range

The level of activity within which the assumptions about fixed and variable costs in cost-volume-profit analysis remain valid.

Contribution Margin Ratio

A financial metric that shows the percentage of sales revenue that exceeds variable costs, indicating the portion contributing to covering fixed costs and generating profit.