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:

IFRS

International Financial Reporting Standards, a set of accounting standards developed by the International Accounting Standards Board (IASB) that is used globally to ensure consistency and transparency in financial reporting.

ASPE

Accounting Standards for Private Enterprises; a set of accounting principles tailored for private companies in Canada.

Bank Loan Payable

A liability representing the amount of borrowed funds from a bank that the borrower is legally required to repay in the future.

Interest Expense

The cost incurred by an entity for borrowed funds; it is the price paid for the use of borrowed money or money earned from deposited funds.