You Are Evaluating a Project for Your Company

question 79

Multiple Choice

You are evaluating a project for your company. You estimate the sales price to be $40 per unit and sales volume to be 2,000 units in year 1; 8,000 units in year 2; and 4,000 units in year 3. The project has a three-year life. Variable costs amount to $25 per unit and fixed costs are $20,000 per year. The project requires an initial investment of $16,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $1,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 35 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?

• A)$16,000
• B)$44,000
• C)$60,000
• D)$90,000

Recognize the influence of cognitive processes and free will in human behavior according to cognitive and humanistic perspectives.

Understand the calculation of gross requirements for components based on product demand.

Comprehend the concept of lead times and their impacts on the scheduling of production and procurement.

Recognize the key components and inputs necessary for a gross material requirements plan.

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Definitions:

Marginal Product

The additional output resulting from the use of one more unit of a production factor.

Factor Of Production

An economic term describing the inputs used in the production of goods or services to earn an income, namely labor, capital, land, and entrepreneurship.

Marginal Productivity Theory

A theory stating that the demand for a factor of production is derived from the marginal product that the factor adds to the output.

Equilibrium Value

The price and quantity at which supply and demand in a market are balanced.