- CFA Exams
- CFA Level I Exam
- Study Session 7. Corporate Finance (1)
- Reading 19. Capital Budgeting
- Subject 1. Cash flow projections

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**CFA Practice Question**

You have been asked to evaluate the proposed installation of a computing network in your firm. The equipment would cost $200,000, including the software necessary to run the new computer network for the next five years. The equipment will be depreciated using straight-line depreciation to a salvage value of $20,000. The use of the equipment will require an increase in net working capital (software, spare parts, e-business consulting fees, etc) equal to $8000. The new computing facilities are expected to save the firm $40,000 a year in before-tax operating costs. After the five years, the firm expects to sell the equipment for $30,000. The firm's marginal tax rate is 40 percent and the appropriate discount rate is 18 percent. What is the total initial investment?

A. $200,000

B. $8,000

C. $208,000

**Explanation:**The initial investment equals the cost of the facilities plus the increase in net working capital.

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