The Potential Owner/managers of the Yet to Be Formed New

question 20

Multiple Choice

The potential owner/managers of the yet to be formed new In-Line Blade Company are evaluating the prospects for the business. The new equipment is expected to be $5.5 million and have after tax cashflows of $400,000 for the first two years, $750,000 in the next two years, and $1,200,000 thereafter indefinitely. The owners estimate that they require a 15% rate of return. What is the value of the In-Line Blade Company; should they go forward with the investment?

• A) $3,872,122; yes.
• B) $446,148; yes.
• C) -$2,000,000; no.
• D) $943,596; yes.
• E) $105,185; yes.

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Definitions:

Function

In mathematics, a relation or expression involving one or more variables, where each input value yields one and only one output value.

Production Function

A mathematical model that describes the relationship between the quantity of output produced and the quantities of inputs used in production.

Returns To Scale

An economic concept describing how the output changes in response to a proportional change in all input factors.

Marginal Product

The additional output that is produced by using one more unit of a particular input, holding all other inputs constant.