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.