Net Present Value: Johnson Entertainment Systems Is Setting Up to Manufacture

question 85

Multiple Choice

Net present value: Johnson Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $1,750,000. Expected cash flows over the next four years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the company's required rate of return of 15 percent, what is the NPV of this project?

• A) $1,169,806
• B) $2,919,806
• C) $4,669,806
• D) $3,122, 607

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Definitions:

Shut-down Price

The price level at which a business's revenue just covers its variable costs, below which it will cease operations.

Average Variable Cost

The average cost of variable inputs (like labor and materials) per unit of output produced.

Minimum

The lowest point on a nonlinear curve, where the slope changes from negative to positive.

Economic Profit

The difference between the total revenue received by a business and the total implicit and explicit costs of a business.