Your Company Is Considering a Machine Which Will Cost $50,000

question 84

Multiple Choice

Your company is considering a machine which will cost $50,000 at Time 0 and which can be sold after 3 years for $10,000.$12,000 must be invested at Time 0 in inventories and receivables;these funds will be recovered when the operation is closed at the end of Year 3.The facility will produce sales revenues of $50,000/year for 3 years;variable operating costs (excluding depreciation) will be 40 percent of sales.No fixed costs will be incurred.Operating cash inflows will begin 1 year from today (at t = 1) .By an act of Congress,the machine will have depreciation expenses of $40,000,$5,000,and $5,000 in Years 1,2,and 3,respectively.The company has a 40 percent tax rate,enough taxable income from other assets to enable it to get a tax refund on this project if the project's income is negative,and a 15 percent required rate of return.Inflation is zero.What is the project's NPV?

• A) $7,673.71
• B) $12,851.75
• C) $17,436.84
• D) $24,989.67
• E) $32,784.25

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Definitions:

Operating Departments

Sections or divisions within a business that are responsible for carrying out its core operations, as opposed to support or administrative departments.

Direct Method

A way of preparing a cash flow statement where actual cash flows from operating activities are listed directly.

Service Department Costs

Expenses associated with departments that do not directly produce goods but provide support services, such as maintenance or security.

Operating Departments

Units or sectors within a business that are directly involved in performing the main function or activity of the organization.