# Acc422 Intermediate Accounting: BE8-5 Amsterdam Company uses a periodic inventory system

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Acc422 Intermediate Accounting

BE8-5

Amsterdam Company uses a periodic inventory system. For April, when the company sold 600 units, the following information is available.

Units Unit Cost Total Cost

April 1 inventory 250 10 2,500

April 15 purchase 400 12 4,800

April 23 purchase 350 13 4,550

1,000 11,850

Compute the April 30 inventory and the April cost of goods sold using the average cost method.

Acc422 Intermediate Accounting

BE8-5

Amsterdam Company uses a periodic inventory system. For April, when the company sold 600 units, the following information is available.

Units Unit Cost Total Cost

April 1 inventory 250 10 2,500

April 15 purchase 400 12 4,800

April 23 purchase 350 13 4,550

1,000 11,850

Compute the April 30 inventory and the April cost of goods sold using the average cost method.

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**FI515 Financial Management: Week 6 Study Guide (version 1)**

FI515 Financial Management

Week 6 Study Guide

1. (TCO D) A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price? (Points : 10)

$16.28

$16.70

$17.13

$17.57

$18.01

2. (TCO D) If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected total return for the coming year? (Points : 10)

7.54%

7.73%

7.93%

8.13%

8.34%

3. (TCO D) Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return? (Points : 10)

6.62%

6.82%

7.03%

7.25%

7.47%

4. (TCO E) Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock? (Points : 10)

Increase the dividend payout ratio for the upcoming year.

Increase the percentage of debt in the target capital structure.

Increase the proposed capital budget.

Reduce the amount of short-term bank debt in order to increase the current ratio.

Reduce the percentage of debt in the target capital structure.

5. (TCO E) Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A’s cost of capital is 10.0%, Division B’s cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A’s projects are equally risky, as are all of Division B's projects. However, the projects of Division A are less risky than those of Division B. Which of the following projects should the firm accept? (Points : 10)

A Division B project with a 13% return.

A Division B project with a 12% return.

A Division A project with an 11% return.

A Division A project with a 9% return.

A Division B project with an 11% return.

6. (TCO D) Butcher Timber Company hired your consulting firm to help them estimate the cost of common equity. The yield on the firm's bonds is 8.75%, and your firm's economists believe that the cost of common can be estimated using a risk premium of 3.85% over a firm's own cost of debt. What is an estimate of the firm's cost of common from retained earnings? (Points : 10)

12.60%

13.10%

13.63%

14.17%

14.74%

7. (TCO F) Warnock Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

WACC: 10.00%

Year 0 1 2 3

---------------------------------------------

Cash flows -$950 $500 $400 $300 (Points : 10)

$54.62

$57.49

$60.52

$63.54

$66.72

8. (TCO F) Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year 0 1 2 3 4 5

-------------------------------------------------------------------------------------

Cash flows -$9,500 $2,000 $2,025 $2,050 $2,075 $2,100 (Points : 10)

2.08%

2.31%

2.57%

2.82%

3.10%

9. (TCO F) Stern Associates is considering a project that has the following cash flow data. What is the project's payback?

Year 0 1 2 3 4 5

------------------------------------------------------------------------

Cash flows -$1,100 $300 $310 $320 $330 $340 (Points : 10)

2.31 years

2.56 years

2.85 years

3.16 years

3.52 years

10. (TCO H) TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its three-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project’s three-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project’s NPV? (Hint: Cash flows are constant in years 1-3.)

WACC 10.0%

Pre-tax cash flow reduction for other products (cannibalization) - $5,000

Investment cost (depreciable basis) $80,000

Straight-line deprec. rate 33.333%

Sales revenues, each year for three years $67,500

Annual operating costs (excl. deprec.) - $25,000

Tax rate 35.0%

a. $3,636

b. $3,828

c. $4,019

d. $4,220

e. $4,431

Indicate your choice for your answer - a,b,c,d,e first and then show your work/explain your answer so as to earn partial credit in the event you selected the incorrect answer.

Week 6 Study Guide

1. (TCO D) A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price? (Points : 10)

$16.28

$16.70

$17.13

$17.57

$18.01

2. (TCO D) If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected total return for the coming year? (Points : 10)

7.54%

7.73%

7.93%

8.13%

8.34%

3. (TCO D) Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return? (Points : 10)

6.62%

6.82%

7.03%

7.25%

7.47%

4. (TCO E) Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock? (Points : 10)

Increase the dividend payout ratio for the upcoming year.

Increase the percentage of debt in the target capital structure.

Increase the proposed capital budget.

Reduce the amount of short-term bank debt in order to increase the current ratio.

Reduce the percentage of debt in the target capital structure.

5. (TCO E) Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A’s cost of capital is 10.0%, Division B’s cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A’s projects are equally risky, as are all of Division B's projects. However, the projects of Division A are less risky than those of Division B. Which of the following projects should the firm accept? (Points : 10)

A Division B project with a 13% return.

A Division B project with a 12% return.

A Division A project with an 11% return.

A Division A project with a 9% return.

A Division B project with an 11% return.

6. (TCO D) Butcher Timber Company hired your consulting firm to help them estimate the cost of common equity. The yield on the firm's bonds is 8.75%, and your firm's economists believe that the cost of common can be estimated using a risk premium of 3.85% over a firm's own cost of debt. What is an estimate of the firm's cost of common from retained earnings? (Points : 10)

12.60%

13.10%

13.63%

14.17%

14.74%

7. (TCO F) Warnock Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

WACC: 10.00%

Year 0 1 2 3

---------------------------------------------

Cash flows -$950 $500 $400 $300 (Points : 10)

$54.62

$57.49

$60.52

$63.54

$66.72

8. (TCO F) Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year 0 1 2 3 4 5

-------------------------------------------------------------------------------------

Cash flows -$9,500 $2,000 $2,025 $2,050 $2,075 $2,100 (Points : 10)

2.08%

2.31%

2.57%

2.82%

3.10%

9. (TCO F) Stern Associates is considering a project that has the following cash flow data. What is the project's payback?

Year 0 1 2 3 4 5

------------------------------------------------------------------------

Cash flows -$1,100 $300 $310 $320 $330 $340 (Points : 10)

2.31 years

2.56 years

2.85 years

3.16 years

3.52 years

10. (TCO H) TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its three-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project’s three-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project’s NPV? (Hint: Cash flows are constant in years 1-3.)

WACC 10.0%

Pre-tax cash flow reduction for other products (cannibalization) - $5,000

Investment cost (depreciable basis) $80,000

Straight-line deprec. rate 33.333%

Sales revenues, each year for three years $67,500

Annual operating costs (excl. deprec.) - $25,000

Tax rate 35.0%

a. $3,636

b. $3,828

c. $4,019

d. $4,220

e. $4,431

Indicate your choice for your answer - a,b,c,d,e first and then show your work/explain your answer so as to earn partial credit in the event you selected the incorrect answer.

**FI515 Financial Management: Week 6 Study Guide (version 6)**

FI515 Financial Management

Week 6 Study Guide (version 6)

1. (TCO D) A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

A.$23.11

B.$23.70

c. $24.31

d. $24.93

e. $25.57

2. (TCO D) If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock’s expected dividend yield for the coming year?

A. 4.42%

B. 4.66%

C. 4.89%

D. 5.13%

E. 5.39%

3. (TCO D) Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

A. 6.62%

B.6.82%

C. 7.03%

D. 7.25%

E. 7.47%

4. (TCO E) Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?

A. The market risk premium declines.

B. The flotation costs associated with issuing new common stock increase.

C. The company’s beta increases.

D. Expected inflation increases.

E. The flotation costs associated with issuing preferred stock increase.

5. (TCO E) If a typical U.S. company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely

A.become riskier over time, but its intrinsic value will be maximized.

B. become less risky over time, and this will maximize its intrinsic value.

C.accept too many low-risk projects and too few high-risk projects.

D.become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.

E. continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.

6. (TCO D) Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of common from retained earnings based on the DCF approach?

A. 9.42%

B. 9.91%

C.10.44%

D.10.96%

E.11.51%

7. (TCO F) Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

WACC: 10.00%

Year 0 1 2 3

-----------------------------------------------

Cash flows -$1,050 $450 $460 $470

A. $ 92.37

B. $ 96.99

C. $101.84

D.$106.93

E. $112.28

8. (TCO F) Data Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year 0 1 2 3

-----------------------------------------------

Cash flows -$1,100 $450 $470 $490

A. 9.70%

B. 10.78%

C.11.98%

D.13.31%

E.14.64%

9. (TCO F) Stern Associates is considering a project that has the following cash flow data. What is the project's payback?

Year 0 1 2 3 4 5

------------------------------------------------------------------------

Cash flows -$1,100 $300 $310 $320 $330 $340

A. 2.31 years

B. 2.56 years

C. 2.85 years

D. 3.16 years

E. 3.52 years

10. (TCO H) Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes, if it decides not to open the new office. The equipment for the project would be depreciated by the straight-line method over the project’s three-year life, after which it would be worth nothing, and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project’s three-year life. What is the project’s NPV? (Hint: Cash flows are constant in years 1-3.)

Week 6 Study Guide (version 6)

1. (TCO D) A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

A.$23.11

B.$23.70

c. $24.31

d. $24.93

e. $25.57

2. (TCO D) If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock’s expected dividend yield for the coming year?

A. 4.42%

B. 4.66%

C. 4.89%

D. 5.13%

E. 5.39%

3. (TCO D) Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?

A. 6.62%

B.6.82%

C. 7.03%

D. 7.25%

E. 7.47%

4. (TCO E) Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?

A. The market risk premium declines.

B. The flotation costs associated with issuing new common stock increase.

C. The company’s beta increases.

D. Expected inflation increases.

E. The flotation costs associated with issuing preferred stock increase.

5. (TCO E) If a typical U.S. company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely

A.become riskier over time, but its intrinsic value will be maximized.

B. become less risky over time, and this will maximize its intrinsic value.

C.accept too many low-risk projects and too few high-risk projects.

D.become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.

E. continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.

6. (TCO D) Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of common from retained earnings based on the DCF approach?

A. 9.42%

B. 9.91%

C.10.44%

D.10.96%

E.11.51%

7. (TCO F) Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

WACC: 10.00%

Year 0 1 2 3

-----------------------------------------------

Cash flows -$1,050 $450 $460 $470

A. $ 92.37

B. $ 96.99

C. $101.84

D.$106.93

E. $112.28

8. (TCO F) Data Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year 0 1 2 3

-----------------------------------------------

Cash flows -$1,100 $450 $470 $490

A. 9.70%

B. 10.78%

C.11.98%

D.13.31%

E.14.64%

9. (TCO F) Stern Associates is considering a project that has the following cash flow data. What is the project's payback?

Year 0 1 2 3 4 5

------------------------------------------------------------------------

Cash flows -$1,100 $300 $310 $320 $330 $340

A. 2.31 years

B. 2.56 years

C. 2.85 years

D. 3.16 years

E. 3.52 years

10. (TCO H) Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes, if it decides not to open the new office. The equipment for the project would be depreciated by the straight-line method over the project’s three-year life, after which it would be worth nothing, and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project’s three-year life. What is the project’s NPV? (Hint: Cash flows are constant in years 1-3.)

**FI515 Financial Management: Week 6 Exam (Version 4)**

FI515 Financial Management

Week 6 Study Guide (Version 4)

1. (TCO D) A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price? (Points: 10)

$16.28

$16.70

$17.13

$17.57

$18.01

2. (TCO D) If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year? (Points: 10)

6.50%

6.83%

7.17%

7.52%

7.90%

3. (TCO D) Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return? (Points: 10)

8.03%

8.24%

8.45%

8.67%

8.89%

4. (TCO E) Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC? (Points: 10)

The market risk premium declines.

The flotation costs associated with issuing new common stock increase.

The company's beta increases.

Expected inflation increases.

The flotation costs associated with issuing preferred stock increase.

5. (TCO E) If a typical U.S. company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely (Points: 10)

become riskier over time, but its intrinsic value will be maximized.

become less risky over time, and this will maximize its intrinsic value.

accept too many low-risk projects and too few high-risk projects.

become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.

continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.

6. (TCO D) Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of common from retained earnings based on the DCF approach? (Points: 10)

9.42%

9.91%

10.44%

10.96%

11.51%

7. (TCO F) Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

WACC: 12.00%

Year 0 1 2 3 4 5

-----------------------------------------------------------------------

Cash flows -$1,100 $400 $390 $380 $370 $360 (Points: 10)

$250.15

$277.94

$305.73

$336.31

$369.94

8. (TCO F) Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year 0 1 2 3 4 5

-------------------------------------------------------------------------------------

Cash flows -$9,500 $2,000 $2,025 $2,050 $2,075 $2,100 (Points: 10)

2.08%

2.31%

2.57%

2.82%

3.10%

9. (TCO F) Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?

WACC: 10.00%

Year 0 1 2 3

---------------------------------------------

Cash flows -$900 $500 $500 $500 (Points: 10)

1.88 years

2.09 years

2.29 years

2.52 years

2.78 years

10. (TCO H) TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its three-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's three-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in years 1-3.)

WACC 10.0%

Pre-tax cash flow reduction for other products (cannibalization) $5,000

Investment cost (depreciable basis) $80,000

Straight-line deprec. rate 33.333%

Sales revenues, each year for three years $67,500

Annual operating costs (excl. deprec.) $25,000

Tax rate 35.0%

a. $3,636

b. $3,828

c. $4,019

d. $4,220

e. $4,431

Indicate your choice for your answer - a,b,c,d,e first and then show your work/explain your answer so as to earn partial credit in the event you selected the incorrect answer. (Points: 10)

Week 6 Study Guide (Version 4)

1. (TCO D) A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price? (Points: 10)

$16.28

$16.70

$17.13

$17.57

$18.01

2. (TCO D) If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year? (Points: 10)

6.50%

6.83%

7.17%

7.52%

7.90%

3. (TCO D) Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return? (Points: 10)

8.03%

8.24%

8.45%

8.67%

8.89%

4. (TCO E) Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC? (Points: 10)

The market risk premium declines.

The flotation costs associated with issuing new common stock increase.

The company's beta increases.

Expected inflation increases.

The flotation costs associated with issuing preferred stock increase.

5. (TCO E) If a typical U.S. company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely (Points: 10)

become riskier over time, but its intrinsic value will be maximized.

become less risky over time, and this will maximize its intrinsic value.

accept too many low-risk projects and too few high-risk projects.

become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.

continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.

6. (TCO D) Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of common from retained earnings based on the DCF approach? (Points: 10)

9.42%

9.91%

10.44%

10.96%

11.51%

7. (TCO F) Barry Company is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

WACC: 12.00%

Year 0 1 2 3 4 5

-----------------------------------------------------------------------

Cash flows -$1,100 $400 $390 $380 $370 $360 (Points: 10)

$250.15

$277.94

$305.73

$336.31

$369.94

8. (TCO F) Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year 0 1 2 3 4 5

-------------------------------------------------------------------------------------

Cash flows -$9,500 $2,000 $2,025 $2,050 $2,075 $2,100 (Points: 10)

2.08%

2.31%

2.57%

2.82%

3.10%

9. (TCO F) Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?

WACC: 10.00%

Year 0 1 2 3

---------------------------------------------

Cash flows -$900 $500 $500 $500 (Points: 10)

1.88 years

2.09 years

2.29 years

2.52 years

2.78 years

10. (TCO H) TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its three-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's three-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in years 1-3.)

WACC 10.0%

Pre-tax cash flow reduction for other products (cannibalization) $5,000

Investment cost (depreciable basis) $80,000

Straight-line deprec. rate 33.333%

Sales revenues, each year for three years $67,500

Annual operating costs (excl. deprec.) $25,000

Tax rate 35.0%

a. $3,636

b. $3,828

c. $4,019

d. $4,220

e. $4,431

Indicate your choice for your answer - a,b,c,d,e first and then show your work/explain your answer so as to earn partial credit in the event you selected the incorrect answer. (Points: 10)