Reference: 10-13
Jimbob Co Jimbob Co Uses a 10% Discount Rate and the Incremental Cost

question 14

Multiple Choice

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine } A & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year } 4 & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.
-Assuming that a business has a project with anticipated positive net annual operating cash flows, assuming all other factors remain the same, the inclusion of income taxes in the capital budgeting analysis will:

• A)increase the net present value.
• B)decrease the net present value.
• C)have no impact on the net present value.
• D)not be determinable.

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Definitions:

Gangrene

The death of body tissue due to either a lack of blood flow or a serious bacterial infection.

Perforation

A medical condition in which a hole or tear occurs in the wall of any part of the gastrointestinal tract or other bodily organs.

Endoscope

A flexible tube with a light and camera attached, used to examine the interior of a bodily organ or space.

Natural Opening

A passage by which substances or objects can enter or exit an organ or body part naturally.