Start-Up Costs to Introduce a New Project Includes $200 000

question 49

Multiple Choice

Start-up costs to introduce a new project includes $200 000 to buy new production equipment and $100 000 to fully install and integrate this equipment.The equipment has an economic life of four years and the company will depreciate it for taxation purposes at 10% prime cost per annum.The equipment is expected to have a salvage value of $55 000 after four years of use.The corporate tax rate is 35%.Calculate the tax effect on salvage cash flows at the final (fourth) year of the project.

• A)no tax effect on cash flows
• B)decrease of cash flow of $19 250
• C)increase of cash flow of $43 750
• D)decrease of cash flow of $43 750
• E)increase of cash flow of $19 250

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Definitions:

Markup

The difference between the cost of a product and its selling price, expressed as a percentage over cost.

Fixed Expenses

Regular and unchanged expenses incurred by a business irrespective of its level of output or sales volume, such as lease payments, insurance, and salaries of permanent employees.

Theory of Constraints

A management paradigm that focuses on identifying and addressing the single bottleneck or constraint that severely limits a system's performance or output.

Bottlenecks

Refer to points of congestion in a production system that significantly slow down the overall process.