Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project.At the end of the project the equipment will be sold for an estimated $300,000.The project will not directly produce any sales but will reduce operating costs by $725,000 a year.The tax rate is 35 percent.The project will require $45,000 of inventory which will be recouped when the project ends.Should this project be implemented if the firm requires a 14 percent rate of return? Why or why not?
A)No; The NPV is -$172,937.49.
B)No; The NPV is -$87,820.48.
C)Yes; The NPV is $251,860.34.
D)Yes; The NPV is $387,516.67.
E)Yes; The NPV is $466,940.57.

Question

Quizplus · Accepted Answer

Initial cash flow = -$2,460,000 - $45,000 = -$2,505,000OCF = $725,000(1 - 0.35) + ($2,460,000/10)(0.35) = $557,350Final cash flow = $45,000 + $300,000 (1 - 0.35) = $240,000

Gateway Communications Is Considering a Project with an Initial Fixed