Mountain Recreation,Inc

question 4

Multiple Choice

Mountain Recreation,Inc.is considering a new product line.The company currently manufactures several lines of snow skiing apparel.The new products,insulated ski bikinis,are expected to generate sales of $1.2 million per year for the next five years.They expect that during this five-year period,they will lose about $150,000 each year in sales on their existing lines of longer ski pants.The new line will require no additional equipment or space in the plant and can be produced in the same manner as the apparel products.The new project will,however,require that the company spend an additional $50,000 per year on insurance in case customers sue for frostbite.Also,a new marketing director would be hired to oversee the line at $75,000 per year in salary and benefits.Because of the different construction of the bikinis,an increase in inventory of $9,000 would be required initially.If the marginal tax rate is 35%,compute the incremental after-tax cash flows for years 1-5.

• A) $634,500 per year
• B) $625,000 per year
• C) $601,250 per year
• D) $537,500 per year

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Definitions:

Negative Returns

Occurs when a company or investment loses more money than it earns or when costs exceed revenues.

MC Curve

The MC Curve, or Marginal Cost Curve, represents the change in total cost that arises when the quantity produced is incremented by one unit. It is crucial in determining the optimum production level.

AVC Curve

The Average Variable Cost curve depicts the per-unit variable cost of production as a function of total output.

ATC Curve

The Average Total Cost curve, illustrating how the total cost per unit of output changes with the level of output.