The Frank Ernst Co

question 44

Multiple Choice

The Frank Ernst Co. wants to add an additional production line. To do this, the company must spend $100,000 to expand its current building and purchase $1.2 million in new equipment. The building expansion has a salvage value of $80,000 and the equipment has a salvage value of $390,001. This new line is expected to produce 200,000 units with a projected sales price of $4.65 per unit and a variable cost of $2.90 a unit. Gross profit from existing products is expected to decline by $29,000 a year as a result of this addition. Fixed costs are $42,000 annually. The net working capital requirement is $36,001. The company uses straight-line depreciation over the life of the product and requires a 15% rate of return. Taxes are incurred at a rate of 34%. The life of the project is five years. What is the total cash flow in year 5?

• A) $553,080
• B) $582,080
• C) $589,080
• D) $618,740
• E) $748,880

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Definitions:

Marginal Utility

The additional satisfaction or benefit a consumer gains from consuming one more unit of a good or service.

Purchases Shift

A change in the buying behavior of consumers, often referring to a movement in demand for goods or services in the market.

Utility Change

refers to changes in the level of satisfaction or happiness that a consumer derives from consuming goods or services, indicating shifts in preferences or economic circumstances.

Marginal Utility

The increase in satisfaction or utility that a person receives from consuming an additional unit of a good or service.