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BASIC INFORMATION: a Three-Year Project Will Cost $60,000 to Construct

question 70

Multiple Choice

BASIC INFORMATION: A three-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the three-year life. The price per unit sold is $20 and the variable cost per
Unit sold is $10. Fixed costs are $30,000 per year.
In addition to the BASIC INFORMATION, you expect the number of units sold to be 7,000 with an
Upper bound of 8,000 and a lower bound of 6,000, and you expect the variable cost per unit to be
$10 per unit with an upper bound of $12.50 and a lower bound of $7.50. Assuming a tax rate of
30%, compute the IRR for the BEST case. Note that salvage is $0, and NWC is $0.

Comprehend the conditions under which a project may have more than one IRR and the implications for capital budgeting.

Recognize the limitations and applicability of MIRR in comparison to the NPV method for evaluating mutually exclusive projects.

Identify the decision-making authority within organizations for major cost control measures, including downsizing.

Understand the usage and limitations of DCF techniques across businesses of different sizes.

Definitions:

Operating Contribution

The portion of revenue that remains after variable expenses are subtracted, indicating how much contributes to covering fixed costs and generating profit.

Restricted Contribution

Funds given to an organization with specific conditions attached regarding their use.

Donation Revenue

Income received from giving without the expectation of receiving something in return, typically for non-profit organizations.

Restricted Fund Method

An accounting strategy used for tracking and reporting separately on resources that are restricted by donors for specific purposes.