American Biodyne (AB) Is Considering Expanding into a New Line

question 28

Multiple Choice

American Biodyne (AB) is considering expanding into a new line of business.The expansion will require an investment of $500,000 in new equipment.This equipment which will cost another $300,000 to install, will be depreciated on a straight-line basis over an 8-year period to an estimated salvage value of zero.If the expansion project is accepted, working capital will increase by $100,000 immediately.Revenues for the first 3 years are forecasted at $650,000 per year and at $800,000 in years 4-8.Operating costs exclusive of depreciation are expected to be $310,000 per year for 3 years and increase to $400,000 per year for the following 5 years.AB has a marginal tax rate of 40% and its required rate of return for the project under consideration is 16%.If AB assumes that the new equipment will have an actual market value of $50,000 at the end of the 8th year, should the expansion be undertaken?

• A)Yes, NPV = $275,114
• B)Yes, NPV = $265,964
• C)Yes, NPV = $302,934
• D)Yes, NPV = $272,434

---

Definitions:

Actual Rate

The current interest rate or the actual cost rate in various financial and business contexts.

Standard Rate

A predetermined rate often used for allocating costs to activities or products, based on budgeted or historical data.

Completed Unit

A unit of product that has undergone the entire production process and is ready for sale or distribution.

Direct Labor Time Variance

The difference between the actual hours worked by employees at the actual labor rate and the standard hours worked at the standard labor rate, used to measure efficiency and productivity in production.