A Project Requires an Initial Investment in Equipment of $90,000

question 24

Multiple Choice

A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0) . The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be
60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. Cash flows from the project are:

• A) CF0: -90,000; CF1: 12,600; CF2: 12,600; CF3: 29,600
• B) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 59,600
• C) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 42,600
• D) none of the above

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Definitions:

Milling Department

A division within a manufacturing setup where milling processes are carried out, often involving cutting, shaping, drilling, or finishing products or components.

Direct Method

A cost allocation method used in cost accounting that directly assigns all direct costs to specific cost objects, such as products or services, without using any allocation for indirect costs.

Service Department

A department within a company that provides essential support services to the production and sales departments, not directly generating revenue.

Assembly Department

A section within a manufacturing facility where components are assembled into final products.