The Frank Ernst Co

question 200

Multiple Choice

The Frank Ernst Co. wants to add an additional production line. To do this, the company must spend $100,000 to expand its current building and purchase $1.2 million in new equipment. The building
Expansion has a salvage value of $80,000 and the equipment has a salvage value of $390,001.
This new line is expected to produce 200,000 units with a projected sales price of $4.65 per unit
And a variable cost of $2.90 a unit. Gross profit from existing products is expected to decline by
$29,000 a year as a result of this addition. Fixed costs are $42,000 annually. The net working
Capital requirement is $36,001. The company uses straight-line depreciation over the life of the
Product and requires a 15% rate of return. Taxes are incurred at a rate of 34%. The life of the project
Is five years. What is the total cash flow in year 5?

• A) $553,080
• B) $582,080
• C) $589,080
• D) $618,740
• E) $748,880

---

Definitions:

Intercompany Sales

Transactions of goods and services between subsidiaries within the same parent company, requiring elimination during consolidation for accurate financial statements.

Effective Tax Rate

The average percentage of net income that a person or corporation pays in taxes, effectively showing the portion of income gone to taxes.

Non-Controlling Interest

A minority share of ownership in a subsidiary that is not directly controlled by the parent company, typically reflected in the equity section of the consolidated financial statement.

Consolidated Financial Position

A representation of a parent company and its subsidiaries' financial status as one entity, summarizing assets, liabilities, and equity.