Computer Disk Duplicators, Inc $\text { "Not applicable }$ -For Proposal 1, the Annual Incremental After-Tax Cash Flow from Proposals

question 124

Multiple Choice

Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate. The firm's cost of capital is 15 percent.
$\begin{array}{llll}&&\text { Proposal }\\\text { Type of Capital } & 1 & 2 & 3 \\\text { Budgeting Decision } & \text { Expansion } & \text { Replacement } & \text { Replacement }\\\hline&& \text { Mut Excl } & \text { Mut Excl } \\\text { Type of Project }&\text { Independent } & \text { with 3 } & \text { with 2 }\\\hline\text { Cost of new asset } & \$ 1,500,000 & \$ 200,000 & \$ 300,000 \\\text { Installation costs } & \$ 0 & \$ 0 & \$ 15,000 \\\text { CCA rate (new asset) } & 10 \% & 20 \% & 20 \%\\\text { Original cost of old asset } & \text { N/A* } & \$ 80,000 & \$ 100,000 \\\text { Purchase date (old asset) } & \text { N/A } & 1 / 1 / 1997 & 1 / 1 / 2000 \\\text { Sale proceeds (old asset) } & \text { N/A } & \$ 50,000 & \$ 120,000 \\\text { CCA rate (old asset) } & \text { N/A } & 20 \% & 20 \%\\\text { Annual net profits before }\\\text { depreciation \& taxes (old) }&N/A&\$30,000&\$25,000\\\text { Annual net profits before }\\\text { depreciation \& taxes (new) }&\$250,000&\$100,000&\$175,000\\\end{array}$
$\text { "Not applicable }$
-For Proposal 1, the annual incremental after-tax cash flow from operations for year 1 is__________

• A) $160,000
• B) $180,000
• C) $210,000
• D) $100,000

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Definitions:

Production Function

A mathematical representation outlining how inputs are transformed into outputs in a production process.

Profit-maximizing

The business objective of achieving the highest possible profit from operations, achieved by balancing costs and revenues.

Factor Price

The payment received by a factor of production, for example, wages for labor, rent for land, or interest for capital.

Production Function

A mathematical representation of the relationship between inputs (such as labor and capital) and the maximum output that can be produced with those inputs.