Gateway Communications is considering a project…


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 $466,940.57

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