Project Y Is a Two- Year Project That Involves the Purchase

question 25

Multiple Choice

Project Y is a two- year project that involves the purchase of new machinery for $100 million,that is expected to yield EBDIT of $59 million in year 1 and $80 million in year two.For tax purposes the machine can be depreciated on a straight- line basis.The current corporate tax rate is 33%.What is the project's ARR?

• A)39%
• B)19%
• C)46%
• D)26%

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Definitions:

Reconciliation Method

A process used in accounting to ensure that two sets of records (usually the balances of two accounts) are in agreement.

Absorption Costing

A calculation method for product pricing that includes all components of manufacturing costs—direct materials, direct labor, both variable and fixed overheads— into the product's overall cost.

Net Operating Income

The profit generated from a business's operations after subtracting operating expenses but before deducting interest and taxes.

Variable Costing

A pricing approach that incorporates only variable manufacturing expenses into the cost of products, while considering fixed overhead costs as expenses for the period.