000 UNITS FOR THE NEXT 5 YEARS AND THEN BE DISCONTINUED. NEW EQUI...

CMA EXAM SUPPORT PACKAGE 2

100,000 units for the next 5 years and then be discontinued. New equipment will be

purchased for $1,200,000 and cost $300,000 to install. The equipment will be

depreciated on a straight-line basis over 5 years for financial reporting purposes and 3

years for tax purposes. At the end of the fifth year, it will cost $100,000 to remove the

equipment, which can be sold for $300,000. Additional working capital of $400,000 will

be required immediately and needed for the life of the product. The product will sell for

$80, with direct labor and material costs of $65 per unit. Annual indirect costs will

increase by $500,000. Kell’s effective tax rate is 40%.

In a capital budgeting analysis, what is the cash outflow at time 0 (initial investment) that

Kell should use to compute the net present value?

$1,300,000.

$1,500,000.

$1,700,000.

$1,900,000.