problem1. The Atlantic Company plans to establish a new branch office in suburban area. The building will cost $200,000 and will be depreciated (on straight-line method) over a 20 year life to a $0 approximate salvage value. Equipment for building will cost an additional $100,000. This equipment has a 20-year life and will be depreciated on a straight-line basis to a $0 estimated salvage value. The branch office is expected to generate additional before tax net income of $30,000 per year. The tax rate is 40 percent and the cost of capital is 12 percent. Evaluate the net present value for the project.
a. $-63,523
b. $+246,477
c. $+53,523
d. $-53,523
problem2. What is the internal rate of return for project which has a net investment of $76,000 and net cash flows of $20,507 per year for seven years?
a. 16%
b. 17%
c. 18.2%
d. 19%
problem3. GoFlo is a small growing firm which is considering the purchase of another truck to serve GoFlo’s expanding customer base. The new truck will cost $21,000 and must generate annual net cash flows of $6,000 over the truck’s 5-year life. What is payback period for this project?
a. 3 years
b. 4.2 years
c. 3.5 years
d. 3.3 years
problem4. The use of sensitivity analysis needs that:
a. a model of project’s cash flows be developed
b. probability distributions of determinants of a project’s cash flows be estimated
c. the firms have access to a extremely large computer
d. the firm is greatly interested in portfolio risk lessening characteristics of a project