The Potential Owner/managers of the Yet to Be Formed New

question 47

Multiple Choice

The potential owner/managers of the yet to be formed new In-Line Blade Company are evaluating the prospects for the business. The new equipment is expected to be $5.5 million and have after tax cash flows of $400,000 for the first two years, $750,000 in the next two years, and $1,200,000 thereafter indefinitely. The owners estimate that they require a 15% rate of return. What is the value of the In-Line Blade Company; should they go forward with the investment?

• A) $3,872,122; yes.
• B) $4,072,236; yes.
• C) -$2,000,000; no.
• D) $943,596; yes.
• E) $105,185; yes.

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Definitions:

Predetermined Overhead Rate

An estimated overhead rate calculated before the accounting period begins, used to allocate overhead costs to products or services.

Direct Labor-Hour

A measure of the work done by laborers who are directly involved in the manufacturing process, calculated in hours.

Manufacturing Overhead Budget

The manufacturing overhead budget estimates the costs of all manufacturing overhead items for a forthcoming period, aiding in the financial planning of production.

Cash Disbursements

The total amount of cash paid by a business, including expenses, debt service, and purchases of assets.