Michelotti Inc

question 9

Multiple Choice

Michelotti Inc. is considering an investment project that would require an initial investment of $140,000 and that would last for 7 years. The annual cash receipts from the project would be $105,000 and the annual cash expenses would be $47,000. The equipment used in the project could be sold at the end of the project for a salvage value of $7,000. The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 19%.
-The net present value of the project is closest to:

• A)$11,914
• B)$37,601
• C)$10,464
• D)$34,151

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Definitions:

Average Operating Assets

Average operating assets are calculated by averaging the total value of a company's assets at the beginning and end of an accounting period, used in evaluating asset efficiency.

Minimum Required Rate Of Return

The lowest return on investment that a person or organizational entity, like a company, would accept for a given investment.

Stockholders' Equity

Represents the owners' claim after subtracting total liabilities from total assets; it consists of initial capital investment, retained earnings, and additional paid-in capital.

Net Operating Income

The income that comes from a firm's primary business activities, not including the subtraction of interest and taxes.