Your Company,which Is Financed Entirely with Common Equity,plans to Manufacture

question 14

Multiple Choice

Your company,which is financed entirely with common equity,plans to manufacture a new product,a cell phone that can be worn like a wristwatch.Two robotic machines are available to make the phone,Machine A and Machine B.The price per phone will be $260.00 regardless of which machine is used to make it.The fixed and variable costs associated with the two machines are shown below,along with the capital (all equity) that must be invested to purchase each machine.The expected sales level is 27,000 units.Your company has tax loss carry-forwards that will cause its tax rate to be zero for the life of the project,so T = 0.How much higher or lower will the project's ROE be if you select the machine that produces the higher ROE,i.e. ,what is ROE_B - ROE_A? (Hint: Since the firm uses no debt and its tax rate is zero,ROE = EBIT/Required investment. ) $\begin{array}{lrr}& \text { Machine A } & \text { Machine B } \\\text { Price per phone (P) } & \$ 260.00 & \$ 260.00 \\\text { Fixed costs (F) } & \$ 1,000,000 & \$ 2,000,000 \\\text { Variable costinit (V) } & \$ 210.00 & \$ 160.00 \\\text { Expected unit sales (Q) } & 27,000 & 27,000 \\\text { Required equity investment } & \$ 2,500,000 & \$ 3,000,000\end{array}$
?

• A) 11.20%
• B) 8.87%
• C) 7.84%
• D) 7.75%
• E) 9.33%

---

Definitions:

Administration

The process of managing and overseeing the operations of an organization or institution, or the execution of policies and decisions.

Benzodiazepine

A class of psychoactive drugs known for their sedative, hypnotic, anxiolytic, and muscle relaxant properties.

Valium

A prescription medication used to treat anxiety, muscle spasms, seizures, and other conditions, known for its calming effects.

Anxiety Disorder

A mental health disorder characterized by feelings of worry, anxiety, or fear that are strong enough to interfere with one's daily activities.