Use the Information for the Question(s)below

question 66

Multiple Choice

Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30 000 and the machine will be depreciated by the straight-line method over its three-year life to a residual value of $0.
The cane manufacturing machine will result in sales of 2 000 canes in year 1. Sales are estimated to grow by 10% per year for each of the three years. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 30% tax bracket and has a cost of capital of 10%.
-Which of the following would you NOT consider when making a capital budgeting decision?

• A)the change in direct labour expense due to the purchase of a new machine
• B)the additional taxes a firm would have to pay in the next year
• C)the opportunity to lease out a warehouse instead of using it to house a new production line
• D)the cost of a marketing study completed last year

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Definitions:

Multiple Product Orders

The process or action of purchasing more than one item or service at a time from the same provider.

Corrective Advertising

Advertising designed to correct previous misleading or deceptive advertisements.

Federal Trade Commission Act

A United States federal law established in 1914 to promote consumer protection and to eradicate anticompetitive business practices.

Deceptive Advertising

Marketing practices that mislead or trick consumers into buying or using a product or service through false claims, incomplete information, or other misleading means.