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Party Place Is Considering a New Investment Whose Data Are

question 48

Multiple Choice

Party Place is considering a new investment whose data are shown below. The equipment that would be used would have a constant annual capital cost allowance over the project's 3-year life and a zero salvage value. This project would require some additional working capital that would be recovered at the end of the project's life. Revenues and cash operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 3. CCA is modified to smooth out the calculations.) WACC10.0%
Net investment in fixed assets (basis) $65,000
Required new working capital$10,000
Annual capital cost allowance$21,665
Sales revenues, each year$70,000
Cash operating costs, each year$25,000
Tax rate35.0%

Apply knowledge of accounts with normal debit or credit balances and analyze their impacts on financial statements.

Understand and apply the principles of preparing a balance sheet.

Calculate and analyze key financial metrics including ending retained earnings, income from operations, and gross profit.

Journalize adjusting entries for inventory and expected customer returns and allowances.

Definitions:

Profit

The financial gain obtained when the revenue earned from business activities exceeds the expenses, costs, and taxes involved in sustaining the activity.

Economies of Scale

The cost advantage that arises with increased output of a product, leading to a reduction in the per-unit cost of production.

Average Total Cost

The total cost of production (fixed and variable costs combined) divided by the number of units produced, indicating the cost per unit of output.

Operation Size

The scale or scope of a business's activities, ranging from small, single-location operations to large, multinational corporations.