(Appendix 8C)Mitton Corporation Is Considering a Capital Budgeting Project That

question 4

Multiple Choice

(Appendix 8C) Mitton Corporation is considering a capital budgeting project that would require investing $160, 000 in equipment with an expected life of 4 years and zero salvage value.Annual incremental sales would be $440, 000 and annual incremental cash operating expenses would be $320, 000.The project would also require a one-time renovation cost of $0 in year 3.The company's income tax rate is 35% and its after-tax discount rate is 12%.The company uses straight-line depreciation.Assume cash flows occur at the end of the year except for the initial investments.The company takes income taxes into account in its capital budgeting. The total cash flow net of income taxes in year 2 is:

• A)$92, 000
• B)$28, 000
• C)$120, 000
• D)$80, 000

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Definitions:

Price-elastic

Refers to the responsiveness of the demand for a good to a change in its price; highly price-elastic goods see significant changes in demand when prices fluctuate.

Shifts to the Right

A phrase indicating an increase in supply or demand in economic graphs, typically showing improvement or growth.

Price Effect

Refers to the impact on consumer demand or the quantity demanded of a good when its price changes, holding other factors constant.

Quantity Effect

The change in total revenue resulting from a change in the quantity of a product sold, holding price constant.