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Orange Inc

question 61

Multiple Choice

Orange Inc.,the Cupertino-based computer manufacturer,has developed a new all-in-one device: phone,music-player,camera,GPS,and computer.The device is called the iPip.The following data have been collected regarding the iPip project.The company has identified a prime piece of real estate and must purchase it immediately for $100,000.In addition,R&D expenditures of $175,000 must be made immediately.During the first year the manufacturing plant will be constructed.The plant will be ready for operation at the end of Year 1.The construction costs are $500,000 and will be paid upon completion.At the end of the Year 1,an inventory of raw materials will be purchased costing $50,000.Production and sales will occur during years 2 and 3.(Assume that all revenues and operating expenses are received (paid) at the end of each year.) Annual revenues are expected to be $850,000.Fixed operating expenses are $100,000 per year and variable operating expenses are 25% of sales.The construction facilities are classified as 10-year property for tax-depreciation purposes.When the plant is closed it will be sold for $200,000.(Note: Assume the investment in plant is depreciated during years 2 and 3.) The land will be sold for $225,000 at the end of year 3.The tax rate on all types of income is 34%.The cost of capital is 12%.What is the undiscounted sum of the initial cash flows incurred at Year 0 and Year 1 for the iPip project?
MACRS Depreciation Rates

Definitions:

Elastic Demand

A situation where the quantity demanded of a product changes significantly in response to changes in the product's price.

Inelastic Demand

Refers to a situation where the quantity demanded of a good or service does not significantly change when its price changes.

Price Elasticity of Demand

A metric that describes the sensitivity of the demand for a product to variations in its price.

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