Davis Company Is Considering the Purchase of a New Piece

question 124

Multiple Choice

Davis Company is considering the purchase of a new piece of equipment that will cost $1,600,000 and have a life of five years with no expected salvage value.The expected cash flows associated with the project are as follows:

- What is the average annual income for this project?

• A) $900,000
• B) $1,500,000
• C) $600,000
• D) $700,000
• E) $300,000

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Definitions:

Equivalent Units

A concept in costing used to convert partially completed goods into an equivalent number of fully completed units for inventory valuation.

First-In, First-Out Method

An inventory valuation method where the oldest inventory items are recorded as sold first, leaving the most recently purchased items in inventory.

Conversion Cost

The combined cost of direct labor and manufacturing overheads incurred to convert raw materials into finished goods.

Equivalent Units

Definition: A concept in cost accounting, equivalent units measure the amount of work done on partially finished goods, expressed in terms of fully completed units.