A Capacity Alternative Has an Initial Cost of $50,000 and Cash

question 42

Multiple Choice

A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years.If the cost of capital is 5 percent,the net present value of this investment is:

• A)greater than $80,000 but less than $130,000.
• B)greater than $130,000.
• C)less than $30,000.
• D)impossible to calculate,because no interest rate is given.
• E)impossible to calculate,because variable costs are not known.

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Definitions:

Maturity Matching Principle

A financial strategy that involves matching the maturities of assets and liabilities to reduce risk in managing working capital and financing.

Revolving Credit Agreement

A Revolving Credit Agreement is a financial arrangement which allows the borrower to withdraw, repay, and redraw loans repeatedly up to a certain credit limit.

Commitment Fee

A fee charged by a lender to a borrower for an agreed-upon loan or line of credit that has not yet been utilized.

Self-Liquidating Debt

A type of short-term loan that is used to finance a project or inventory that will generate enough income to pay back the loan.