Dexter Smith & Co

question 36

Multiple Choice

Dexter Smith & Co.is replacing a machine simply because it has worn out.The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life.The firm has a 34 percent tax rate,uses straight-line depreciation over an asset's life,and has a positive net income.Given this,which one of the following statements is correct?

• A)As a project, the new machine has a net present value equal to minus one times the machine's purchase price.
• B)The new machine will have a zero rate of return.
• C)The new machine will generate positive operating cash flows, at least in the first few years of its life.
• D)The new machine will create a cash outflow when the firm disposes of it at the end of its life.
• E)The new machine creates erosion effects.

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Definitions:

Marginal Product

The additional output produced by using one more unit of a particular input, holding other inputs constant.

Technology Change

The process by which new technologies are developed and introduced, resulting in changes to production processes, products, and industry standards.

Labor Employment

The engagement of workers in the workforce to perform tasks in exchange for wages or salaries.

Marginal Product

The additional output produced as a result of utilizing one more unit of a particular input.