A Company Is Contemplating Investing in a New Piece of Manufacturing

question 3

Multiple Choice

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company's desired rate of return is $100,000. The IRR on the project is 12%. Which of the following statements is true?

• A) The project should not be accepted because the net present value is negative.
• B) The desired rate of return used to calculate the present value of the future cash flows is less than 12%.
• C) The desired rate of return used to calculate the present value of the future cash flows is more than 12%.
• D) The desired rate of return used to calculate the present value of the future cash flows is equal to 12%.

---

Definitions:

Direct Labor-hours

The total hours worked by employees directly involved in the production process, used as a basis for allocating labor costs to products or job orders.

Variable Overhead Efficiency Variance

The difference between the expected (standard) and actual variable overhead costs based on the actual level of an activity.

Variable Manufacturing Overhead

The portion of manufacturing overhead costs that varies directly with the volume of production, such as utilities for machinery.

Variable Overhead Efficiency Variance

The difference between the actual variable overhead incurred and the standard cost of variable overhead allocated for the actual production achieved.