You Are Considering a Project That Has Been Assigned a Discount

question 55

Multiple Choice

You are considering a project that has been assigned a discount rate of 14 percent.If you start the project today,you will incur an initial cost of $8,500 and will receive cash inflows of $5,550 a year for two years.If you wait one year to start the project,the initial cost will rise to $9,200 and the cash flows will increase to $5,800 a year for two years.What is the value of the option to wait?

• A)-$331.40
• B)-$194.46
• C)$228.51
• D)$230.49
• E)$334.68

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Definitions:

Actual Overhead Cost

The real expenses incurred for overhead in a given period, which may differ from budgeted or standard costs.

Overhead Applied

This term refers to the allocation of overhead costs to specific cost objects, such as products or projects, based on a predetermined rate.

Overapplied

A situation where the allocated indirect costs exceed the actual indirect costs incurred.

Predetermined Overhead Rates

An estimated rate used to allocate manufacturing overhead to individual products or job orders, calculated at the beginning of an accounting period.