Use the following information to answer Multiple Choice Problems 16 to 23: Future Electronics Corp. (FEC) is considering the purchase of an additional assembly line for their new smartphone. The new assembly line costs $1 million (at t 0) and can be sold for $115,000 at the end of its expected 4-year operating life. The new assembly line would increase the annual output capacity from currently 750,000 to 950,000 smartphones per year (at t 1 to t 4). FEC estimates to earn $10 per smartphone, calculated as sales less operating expenses (not including taxes, depreciation, or adjustments for net working capital). A study conducted by an independent consulting firm estimates that FEC will be able to lower net working capital by $50,000 when the new assembly line is installed (at t 0), and that net working capital will increase again by $50,000 at the end of the machine's operating life (at t 4). The fee for this study amounts to $18,000 and is due today. The new assembly line belongs to asset class 43 with a CCA rate of 30%. FEC's required rate of return is 12%, and FEC's corporate tax rate is 35%. Note: You don't need to find the present value of all cash flows. Calculate only the relevant numbers required to answer the questions below. 16. The fee payment of $18,000 for the study conducted by the consulting firm is an example of: a) A sunk cost b) An opportunity cost c) A change in net working capital d) An initial investment e) A residual salvage 17. What is the initial cash outlay (i.e., the total cash flow at t= 0; excluding any CCA tax shields)? a) -$617,500 b) -$950,000 c) -$968,000 d) -$1,000,000 e) -$1,050,000 18. What is the total cash flow in year 3 (at t= 3; excluding any CCA tax shields)? a) $1,300,000 b) $1,362,475 c) $2,000,000 d) $2,018,000 e) $6,175,000
Use the following information to answer Multiple Choice Problems 16 to 23: Future Electronics Corp. (FEC) is considering the purchase of an additional assembly line for their new smartphone. The new assembly line costs $1 million (at t 0) and can be sold for $115,000 at the end of its expected 4-year operating life. The new assembly line would increase the annual output capacity from currently 750,000 to 950,000 smartphones per year (at t 1 to t 4). FEC estimates to earn $10 per smartphone, calculated as sales less operating expenses (not including taxes, depreciation, or adjustments for net working capital). A study conducted by an independent consulting firm estimates that FEC will be able to lower net working capital by $50,000 when the new assembly line is installed (at t 0), and that net working capital will increase again by $50,000 at the end of the machine's operating life (at t 4). The fee for this study amounts to $18,000 and is due today. The new assembly line belongs to asset class 43 with a CCA rate of 30%. FEC's required rate of return is 12%, and FEC's corporate tax rate is 35%. Note: You don't need to find the present value of all cash flows. Calculate only the relevant numbers required to answer the questions below. 16. The fee payment of $18,000 for the study conducted by the consulting firm is an example of: a) A sunk cost b) An opportunity cost c) A change in net working capital d) An initial investment e) A residual salvage 17. What is the initial cash outlay (i.e., the total cash flow at t= 0; excluding any CCA tax shields)? a) -$617,500 b) -$950,000 c) -$968,000 d) -$1,000,000 e) -$1,050,000 18. What is the total cash flow in year 3 (at t= 3; excluding any CCA tax shields)? a) $1,300,000 b) $1,362,475 c) $2,000,000 d) $2,018,000 e) $6,175,000
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Use the following information to answer Multiple Choice Problems 16 to 23:
Future Electronics Corp. (FEC) is considering the purchase of an additional assembly line for their new
smartphone. The new assembly line costs $1 million (at t 0) and can be sold for $115,000 at the end of
its expected 4-year operating life. The new assembly line would increase the annual output capacity from
currently 750,000 to 950,000 smartphones per year (at t 1 tot = 4). FEC estimates to earn $10 per
smartphone, calculated as sales less operating expenses (not including taxes, depreciation, or adjustments
for net working capital). A study conducted by an independent consulting firm estimates that FEC will be
able to lower net working capital by $50,000 when the new assembly line is installed (at t= 0), and that
net working capital will increase again by $50,000 at the end of the machine's operating life (at t = 4).
The fee for this study amounts to $18,000 and is due today. The new assembly line belongs to asset class
43 with a CCA rate of 30%. FEC's required rate of return is 12%, and FEC's corporate tax rate is 35%.
Note: You don't need to find the present value of all cash flows. Calculate only the relevant numbers
required to answer the questions below.
16. The fee payment of $18,000 for the study conducted by the consulting firm is an example of:
a) A sunk cost
b) An opportunity cost
c) A change in net working capital
d) An initial investment
e) A residual salvage
17. What is the initial cash outlay (i.e., the total cash flow at t= 0; excluding any CCA tax shields)?
a) -$617,500
b) -$950,000
c) -$968,000
d) -$1,000,000
e) -$1,050,000
18. What is the total cash flow in year 3 (at t= 3; excluding any CCA tax shields)?
a) $1,300,000
b) $1,362,475
c) $2,000,000
d) $2,018,000
e) $6,175,000
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