Reference: 10-06
the Becker Company Is Interested in Buying a Piece

question 94

Multiple Choice

Reference: 10-06
The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: $$\begin{array} { | l | c | } \hline \text { Cost of required equipment } & \$ 250,000 \\\hline \text { Working capital required } & \$ 100,000 \\\hline \text { Annual operating cash inflows } & \$ 80,000 \\\hline \text { Cash repair at end of 4 years } & \$ 40,000 \\\hline \text { Salvage value at end of 6 years } & \$ 90,000 \\\hline\end{array}$$ This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%.
-The total net present value of the proposed equipment acquisition is closest to:

• A)$21,760.
• B)$78,240.
• C)$0.
• D)($1,600).

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Definitions:

Factory Overhead

All indirect costs associated with manufacturing beyond direct materials and direct labor, such as maintenance, utilities, and salaries of supervisory personnel.

Direct Labor

The cost of wages for employees directly involved in the production of goods or services.

Process Costing System

A costing method used in industries where production is continuous and units are indistinguishable from each other, allocating costs to units of product based on the process they go through.

Work In Process Accounts

Accounts used to track the costs of unfinished goods in production processes at any point in time.