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

question 47

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 cash flows 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) $4,072,236; yes.
• C) -$2,000,000; no.
• D) $943,596; yes.
• E) $105,185; yes.

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Definitions:

Economic Change

Alterations in the structure, performance, or operations of an economy, often marked by growth or decline.

Manufacturing

The process of converting raw materials into finished goods through the use of tools, machinery, and labor.

Economic Assets

Resources with economic value that an individual, company, or country owns or controls with the expectation that it will provide future benefits.

Wealth

Money and economic assets that a person or family owns.