2D2B KUNKLE PRODUCTS IS ANALYZING WHETHER OR NOT TO INVEST IN EQUIPME...

312.

CSO: 2D2a

LOS: 2D2b

Kunkle Products is analyzing whether or not to invest in equipment to manufacture a new

product. The equipment will cost $1 million, is expected to last 10 years, and will be

depreciated on a straight-line basis for both financial reporting and tax purposes.

Kunkle’s effective tax rate is 40%, and its hurdle rate is 14%. Other information

concerning the project is as follows.

Sales per year = 10,000 units

Selling price = $100 per unit

Variable cost = $70 per unit

A 10% reduction in variable costs would result in the net present value increasing by

approximately

a.

$156.000.

b.

$219,000.

c.

$365,000.

d.

$367,000.