After Ten Years as a General Auto Mechanic in a Local

question 72

Multiple Choice

After ten years as a general auto mechanic in a local garage, Joe decides he is tired of working for others, especially since business is typically slow and he works partially on commission. So, he decides to open his own garage. After estimating the cash flows for his new garage, he finds a large, positive NPV. Which of the following is most likely true about his analysis?

• A) The discount rate he used must be too low.
• B) Unless he can find a true source of value in his new venture, he probably made a mistake in estimating his cash flows.
• C) He has likely been overly optimistic about the future and has underestimated future cash flows.
• D) His estimates of initial outlays must be off.
• E) His analysis is probably correct provided there is adequate competition in the auto repair business.

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Definitions:

Fixed Cost

Costs that do not vary with the production volume or level of services provided, such as rent, salaries, and insurance.

Salary

Salary refers to a fixed regular payment, typically paid on a monthly or biweekly basis but often expressed as an annual sum, made by an employer to an employee.

Incremental Manufacturing Cost

The additional cost incurred to produce an extra unit of a product, reflecting only those costs that directly change with the level of production.

Production

Production involves the processes and methods used to transform raw materials or components into finished goods or services.