(Appendix 8C)Freiman Corporation Is Considering Investing in a Project That

question 3

Multiple Choice

(Appendix 8C) Freiman Corporation is considering investing in a project that would have a 4 year expected useful life.The company would need to invest $160, 000 in equipment that will have zero salvage value at the end of the project.Annual incremental sales would be $390, 000 and annual cash operating expenses would be $270, 000.In year 3 the company would have to incur one-time renovation expenses of $70, 000.Working capital in the amount of $10, 000 would be required.The working capital would be released for use elsewhere at the end of the project.The company uses straight-line depreciation on all equipment. The income tax expense in year 2 is:

• A)$24, 000
• B)$21, 000
• C)$36, 000
• D)$3, 000

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Definitions:

Weighted Average Cost

Refers to a method used to calculate the combined average cost of goods or services, considering their respective weights or importance.

Equity

The value of an ownership interest in a company, represented by the shares held by its investors.

Pre-Tax Cost

The expense associated with a resource or service before any taxes are applied.

Levered Value

The value of a firm that includes the impact of borrowing on its overall valuation.