13. Assume that the firm in 12 above can add a new division at a cost of $80,000

Question

13. Assume that the firm in 12 above can add a new division at a cost of $80,000, which will increase NOPAT by $15,200. Would the firm add the division?

a. Yes. Abnormal earnings would increase by $9,200, adding additional value to the firm.

b. Yes. This project has a positive net present value of more than $10,000, creating additional value to the firm.

c. No. This project creates additional abnormal earnings of $3,200, which is less than the 15% required return.

d. No. The discount rate may increase, causing the value of the firm to decline.

Explanation / Answer

c. No. This project creates additional abnormal earnings of $3,200, which is less than the 15% required return.

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