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%

• A) $24,112
• B) $25,318
• C) $26,584
• D) $27,913

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Definitions:

Years of Experience

Refers to the length of time someone has spent gaining knowledge or skills in a particular job or activity.

Nominal Variable

A nominal variable is a type of categorical data that represents different categories or groups which do not have a natural order or ranking.

Indicator Variables

Indicator Variables, also known as dummy variables, are numeric variables used in statistical models to represent categorical data with two or more categories.

Regression Model

A statistical technique used to analyze and model the relationship between a dependent variable and one or more independent variables.