Use the Information Below to Answer the Following Questions Depreciation Has Been Calculated on a Straightline Basis

question 40

Multiple Choice

Use the information below to answer the following questions.
Y3 Ltd is expanding its production of binoculars. The plant is expected to cost $750,000, have a life of 5 years, and a nil residual value. It will be ready for operation on 31 December 2017. The following statement of comprehensive income figures for the new binoculars are forecast: $\begin{array}{llllll}&2018 & 2019 & 2020 & 2021 & 2022 \\&\$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m} & \$ \mathrm{~m}\\\text { Sales } & 1.5 & 1.3 & 1.4 & 1.2 & 1.1 \\\text { Costs (including depreciation) } & 1.0 & 1.0 & 1.0 & 1.0 & 1.0 \\\hline \text { Profit before tax } & \underline{0.5} & 0.3 & 0.4 & 0.2 & 0.1\end{array}$ Depreciation has been calculated on a straightline basis. You should assume that all cash flows occur at the end of the year in which they arise. The company's cost of capital is 10%. Ignore taxation.
-Refer to the table above. The payback period is:

• A)between years 2 and 3.
• B)between years 4 and 5.
• C)between years 3 and 4.
• D)between years 1 and 2.

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Definitions:

Draft

Any instrument (such as a check) drawn on a drawee (such as a bank) that orders the drawee to pay a certain sum of money, usually to a third party (the payee), on demand or at a definite future time.

Drawee

The party that is ordered to pay a draft or check. With a check, a financial institution is always the drawee.

Payee

The individual or entity to whom a payment is to be made or has been made, typically in the context of financial transactions.

Promissory Note

A written promise to pay a specified sum of money to a designated person at a fixed or determinable future time.