John Kay Inc

question 20

Multiple Choice

John Kay Inc.is considering the installation of a new production line to make automated flying shuttles for weaving machines.The capital cost of the equipment is $2.2 million.The machines on the new line are classified as 15-year property.Kay plans to operate the line for two years,at which time the project will end and the assets will be disposed of for $1,000,000.The new line requires an increase in net working capital of $20,000,which would be liquidated at the end of the project.The investment outlays would occur immediately.
Sales are expected to be constant at $2,000,000,and operating expenses at $800,000.Assume that all revenues and operating expenses are received (paid) at the end of each of the two years of operations.Kay's marginal tax rate is 35 percent.Kay's cost of capital is 11%.What is initial cash flow for the flying shuttle project?
MACRS Depreciation Rates

• A) $2,220,000
• B) $2,200,000
• C) $0
• D) -$2,200,000
• E) -$2,220,000

---

Definitions:

Covariation Principle

A concept in social psychology that explains how we attribute behavior to consistent internal or external factors over time.

Discounting Principle

The tendency to reduce the importance of any potential cause of another’s behavior to the extent that other potential causes exist.

Internal Attribution

The process of assigning the cause of behavior to an individual's internal characteristics or disposition rather than to external factors.

Magical Thinking

A belief system where individuals think that their thoughts, actions, or words can influence the outcome of events in the physical world in a manner that defies the conventional laws of cause and effect.