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(Appendix 13C) Boynes Corporation Is Considering a Capital Budgeting Project

question 36

Multiple Choice

(Appendix 13C) Boynes Corporation is considering a capital budgeting project that would require investing $200,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $490,000 and annual incremental cash operating expenses would be $330,000. The project would also require an immediate investment in working capital of $10,000 which would be released for use elsewhere at the end of the project. The project would also require a one-time renovation cost of $70,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 14%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.
-The total cash flow net of income taxes in year 2 is:

Understand the difference between marginal cost, average total cost, and marginal product in the context of production and cost functions.

Distinguish between explicit and implicit costs, and understand their implications for economic and accounting profit.

Analyze the impact of production scale on cost structures and managerial decisions regarding output levels.

Apply the concept of opportunity cost in economic decision-making.

Definitions:

Break-Even Sales

The level of sales at which total revenues equal total costs, resulting in neither profit nor loss for the business.

Common Fixed Expenses

Common fixed expenses are costs that do not fluctuate with the volume of production or sales, shared by different segments or products of a business, like rent and insurance.

Operating Period

The span of time during which a company or a project is expected to operate or carry out its activities.

Break-Even Sales

The amount of revenue required to cover all fixed and variable costs, resulting in a net income of zero.