The Owner of a Number of Gas Stations Is Considering

question 57

Multiple Choice

The owner of a number of gas stations is considering installing coffee machines in his gas stations. It will cost $270,000 to install the coffee machines, and they are expected to boost cash flows by $120,536 per year for their five-year working life. What must the cost of capital be if this investment has a profitability index of 1?

• A)1.89%
• B)3.78%
• C)7.55%
• D)9.44%

---

Definitions:

First Stage Allocations

The process of assigning indirect costs to different departments or cost centers within a business.

Equipment Depreciation

The process of allocating the cost of tangible assets over their useful lives, reflecting the decrease in value due to use, wear and tear, or obsolescence.

Supervisory Expense

Costs associated with managerial or oversight activities within an organization, typically involving salaries and benefits of supervising staff.

Activity-Based Costing

A costing method that assigns overhead and indirect costs to specific activities related to production.