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

question 61

Multiple Choice

(Appendix 8C) Folino Corporation is considering a capital budgeting project that would require investing $120, 000 in equipment with an expected life of 4 years and zero salvage value.Annual incremental sales would be $380, 000 and annual incremental cash operating expenses would be $300, 000.The project would also require an immediate investment in working capital of $10, 000 which would be released for use elsewhere at the end of the project.The project would also require a one-time renovation cost of $30, 000 in year 3.The company's income tax rate is 35% and its after-tax discount rate is 15%.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 3 is:

• A)$32, 500
• B)$62, 500
• C)$43, 000
• D)$50, 000

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Definitions:

Thorndike

Edward Thorndike, an American psychologist, who is famous for his work in the early 20th century on learning theory and the law of effect.

Behavior Modification

The application of operant-conditioning techniques to teach new responses or to reduce or eliminate maladaptive or problematic behavior; also called applied behavior analysis.

Puzzle Boxes

Experimental devices used in animal learning research, where an animal must solve a problem or manipulate mechanisms to escape or obtain a reward.

Thorndike

An American psychologist who developed the law of effect, which states that behaviors followed by positive outcomes are likely to be repeated, while those followed by negative outcomes are not.