Cameron Industries Is Purchasing a New Chemical Vapor Depositor in Order

question 58

Multiple Choice

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $5,000,000 to buy the machine and $10,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,500,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of six years and will be depreciated over those six years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 2?

• A) $835,000
• B) $2,665,000
• C) $2,434,000
• D) $831,667

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Definitions:

Marginal Utility Per Dollar

The additional satisfaction or utility gained from spending one more dollar on a good or service.

Consumer Equilibrium

A state where the consumer has allocated their resources in such a way that maximizes their utility, given their budget constraint.

Income And Substitution Effects

The changes in quantity demanded of a good due to a change in income (income effect) or a change in price leading consumers to substitute one good for another (substitution effect).

Demand Curve

A visual chart that illustrates how the quantity of a product demanded by customers varies according to its price.