Scenario 4.7 The B. Sharp Company Has a Rapidly Growing Product Line

question 96

Multiple Choice

Scenario 4.7
The B. Sharp Company has a rapidly growing product line that requires two work centers, X and Y for manufacture. Work Center X has a current capacity of 50,000 units per year, and Work Center Y is capable of 55,000 units per year. This year (year 0) , sales of the product line are expected to reach 50,000 units. Growth is projected at an additional 3,000 units each year through year 3. Pre-tax profits are expected to be $60 per unit throughout the 3-year planning period. Two alternatives are being considered:1) Expand both Work Centers X and Y at the end of year 0 to a capacity of 60,000 units per year, at a total cost for both Work Centers of $500,000;
2) Expand Work Center X at the end of year 0 to 55,000 units per year, matching Work Center Y, at a cost of $300,000, then expanding both Work Centers to 60,000 units per year at the end of year 2, at an additional cost at that time of $350,000.
The Sharp Company will not consider projects that don't show a 3rd year positive net present value using a discount rate of 20%.
-Use the information in Scenario 4.7. What is the pre-tax cash flow (net present value) for alternative #1 compared to the base case of doing nothing for the next five years?

• A) negative pre-tax cash flow
• B) more than $0 but less than $100,000
• C) more than $100,000 but less than $200,000
• D) more than $200,000

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