Your Company,which Is Financed Entirely with Common Equity,plans to Manufacture

question 34

Multiple Choice

Your company,which is financed entirely with common equity,plans to manufacture a new product,a cell phone that can be worn like a wristwatch.Two robotic machines are available to make the phone,Machine A and Machine B.The price per phone will be $250.00 regardless of which machine is used to make it.The fixed and variable costs associated with the two machines are shown below,along with the capital (all equity) that must be invested to purchase each machine.The expected sales level is 25,000 units.Your company has tax loss carry-forwards that will cause its tax rate to be zero for the life of the project,so T = 0.How much higher or lower will the project's ROE be if you select the machine that produces the higher ROE,i.e.,what is ROE_B − ROE_A? (Hint: Since the firm uses no debt and its tax rate is zero,ROE = EBIT/Required investment.)

• A)6.00%
• B)6.67%
• C)7.00%
• D)7.35%
• E)7.72%

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Definitions:

Indirect Method

An approach to assemble the cash flow statement by adjusting net income for fluctuations in balance sheet accounts to determine the cash flow originating from operations.

Operating Activities

The component of cash flow statement that reflects the cash generated or used by the core business operations.

Net Cash

The amount of cash available after accounting for cash inflows and outflows, indicating a company's liquidity.

Indirect Method

A method of reporting net cash flow from operating activities on the cash flow statement by adjusting net income for changes in the balance sheet accounts.