Ecogen Is Considering the Purchase of Some New Equipment That

question 18

Multiple Choice

Ecogen is considering the purchase of some new equipment that will cost $340,000 installed. The equipment will produce a product that must be FDA approved and this will require at least a year. Net cash flow in Year 1 will be a negative $110,000 but is expected to be a positive $50,000 in Year 2. Net cash flows will be $150,000, $240,000, and $330,000 in the next 3 years. At the end of 5 years the equipment and the product will be obsolete. If the firm's marginal tax rate is 40% and their costs of capital is 15%, should they invest in the new equipment?

• A) Yes, NPV = $2,090
• B) Yes, NPV = $12,390
• C) No, NPV = -$63,210
• D) No, NPV = -$12,210

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Definitions:

Revenue Variance

The difference between actual revenue and budgeted or forecasted revenue.

Activity Level

A measure of the volume of production or services activity within a company, often used to allocate variable costs.

Revenue Variance

The difference between the actual revenue earned and the budgeted or expected revenue, indicating the effectiveness of sales strategies and market conditions.

Activity Level

A measure of the amount of work performed or units produced, used often in costing to allocate fixed costs properly.