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Use the Table for the Question(s) Below -Panjandrum Industries, a Manufacturer of Industrial Piping, Is Evaluating Whether

question 75

Multiple Choice

Use the table for the question(s) below
$\begin{array} { l c c } & \text { Year 0 } & \text { Years 1 to } 10 \\\text { Revenues } & & 3.50 \\\text {-Manufacturing Expenses } && - 0.5 \\\text {-Marketing Expenses } && - 0.25 \\\text {-Depreciation } && - 0.8 \\\hline \text { =EBIT } && 1.95 \\\text { - Taxes (40\%) } && - 0.78 \\\hline \text { =Unlevered net income } && 1.17 \\\text { +Depreciation } && + 0.8 \\\text { - Additions to Net Working Capital } && - 0.2 \\\text { - Capital Expenditures } & - 8.00 & \\\hline \text { =Free Cash Flow } & & 1.77\end{array}$
-Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision. There are concerns of the sensitivity of this project to changes in the cost of capital. For what cost of capital does this project break even?

Definitions:

Fixed Manufacturing Overhead

Refers to the consistent, non-variable costs associated with manufacturing a product, such as factory lease payments and salaries of permanent staff.

Direct Labor

The wages and other costs for labor that are directly involved in the manufacturing of a product or the provision of a service.

Raw Material

The basic material from which a product is made, typically processed and used in the manufacturing process.

Materials Price Variance

The difference between the actual cost of raw materials and the expected (standard) cost, used in budgeting and financial analysis to gauge purchasing efficiency.