Use the Following Information to Answer the Question(s)below

question 93

Multiple Choice

Use the following information to answer the question(s) below.
Galt Motors currently produces 500,000 electric motors a year and expects output levels to remain steady in the future.It buys armatures from an outside supplier at a price of $2.50 each.The plant manager believes that it would be cheaper to make these armatures rather than buy them.Direct in-house production costs are estimated to be only $1.80 per armature.The necessary machinery would cost $700,000 and would be obsolete in 10 years.This investment would be depreciated to zero for tax purposes using a 10-year straight line depreciation.The plant manager estimates that the operation would require additional working capital of $40,000 but argues that this sum can be ignored since it is recoverable at the end of the ten years.The expected proceeds from scrapping the machinery after 10 years are estimated to be $10,000.Galt Motors pays tax at a rate of 21% and has an opportunity cost of capital of 14%.
-The incremental cash flow that Galt Motors will incur in year 10 if they elect to manufacture armatures in-house is closest to:

• A)$40,000.
• B)$335,000.
• C)$375,000.
• D)$405,000.

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Definitions:

Supernatant

The liquid portion of a substance from which solids have settled to the bottom, as with a urine specimen after centrifugation.

Urine

A liquid by-product of metabolism in humans and many animals, expelled from the body.

Centrifuge

A machine that uses centrifugal force to separate particles or substances of different densities within a liquid.

Protozoal Infection

A type of infection caused by protozoa, single-celled organisms that can either be free-living or parasitic.