Your Company,which Is Financed Entirely with Common Equity,plans to Manufacture

question 57

Multiple Choice

Your company,which is financed entirely with common equity,plans to manufacture a new product,a cell phone that can be worn like a wristwatch.Two robotic machines are available to make the phone,Machine A and Machine B.The price per phone will be $260.00 regardless of which machine is used to make it.The fixed and variable costs associated with the two machines are shown below,along with the capital (all equity) that must be invested to purchase each machine.The expected sales level is 27,000 units.Your company has tax loss carry-forwards that will cause its tax rate to be zero for the life of the project,so T = 0.How much higher or lower will the project's ROE be if you select the machine that produces the higher ROE,i.e. ,what is ROE_B - ROE_A? (Hint: Since the firm uses no debt and its tax rate is zero,ROE = EBIT/Required investment. ) ​

• A) 11.20%
• B) 8.87%
• C) 7.84%
• D) 7.75%
• E) 9.33%

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Definitions:

Accounts Receivable

Money owed to a business by its customers for goods or services delivered but not yet paid for.

Purchase Order

A formal document sent from a buyer to a supplier with a request to purchase specified products or services at agreed upon terms.

Withdrawal Kanban

A signaling system within the Just-in-Time (JIT) manufacturing process that indicates when to withdraw parts or materials from the supply chain to the production line.

Activity-Based Costing

A method of allocating overhead and indirect costs to specific activities, providing more accurate product or service costing.