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Author Question: Because fixed costs do not vary with a firm's revenues, firms with high levels of fixed cost enjoy ... (Read 79 times)

rl

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on: Jul 10, 2018
Because fixed costs do not vary with a firm's revenues, firms with high levels of fixed cost enjoy
  lower levels of operating risk because their costs are more certain, making budgeting easier.
 
  Indicate whether the statement is true or false

Question 2

J.B. Enterprises purchased a new molding machine for 85,000. The company paid 8,000 for
  shipping and another 7,000 to get the machine integrated with the company's existing assets. J.B.
 
  must maintain a supply of special lubricating oil just in case the machine breaks down. The
  company purchased a supply of oil for 4,000. The machine is to be depreciated on a straight-line
  basis over its expected useful life of 8 years. Which of the following statements concerning the
  change in working capital is MOST accurate?
  A) The 4,000 may be expensed each year over the life of the project as part of the incremental
  free cash flows.
  B) The 4,000 is added to the initial outlay and recaptured during the terminal year, hence
  having no impact on the projects NPV or IRR.
  C) Even if the 4,000 is fully recovered at the end of the project, the project's NPV and IRR will
  be lower if the change in working capital is included in the analysis.
  D) The 4,000 paid for oil is added to the initial outlay, offset by the tax savings 1600.
Foundations of Finance ¦ Keown, Petty, Martin ¦ 9th Edition
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jasonq

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Reply #1 on: Jul 10, 2018
Answer to Question 1

FALSE

Answer to Question 2

C


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