Capital Budgeting Solution

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Corporate Finance: The Core (Berk/DeMarzo) Chapter 7 - Fundamentals of Capital Budgeting 1) Which of the following statements is false? A) Because value is lost when a resource is used by another project, we should include the opportunity cost as an incremental cost of the project. B) Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis. C) Overhead expenses are associated with activities that are not directly attributable to a single business activity but instead affect many different areas of the corporation. D) When computing the incremental earnings of an investment decision, we should include all changes between the firm’s earnings with the…show more content…
Also suppose that for each Glucoscan monitor sold, GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 75%. Considering the increase in the sale of testing strips, the incremental impact of this price drop on the firms EBIT is closest to: A) A decline of 1.5 million B) Adecline of 0.7 million C) An increase of 0.7 million D) An increase of 1.5 million Answer: C Explanation: A) B) C) Without Price Cut Monitor sales = 100,000 × ($129 - $50) = $7,900,000 Strip sales = 100,000 × ($100 - $25) = $7,500,000 Total EBIT = 7,900,000 + 7,500,000 = 15,400,000 With Price Cut Monitor sales = 130,000 × ($99 - $50) = $6,370.000 Strip sales = 130,000 × ($100 - $25) = $9,750,000 Total EBIT = 6,370,000 + 9,750,000 = 16,120,000 Incremental = 16,120,000 - 15,400,000 = 720,000 D) Diff: 3 Topic: 7.1 Forecasting Earnings Skill: Analytical Use the information for the question(s) below. The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be
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