CIMAPRO19-P02-1 Exam - Topic 9 Question 14 Discussion

Question

A company has recently developed a new lawnmower with an estimated market life of 5 years. Production and sale of the lawnmower will require investment in new production equipment costing $750,000. It is expected that this equipment could be sold back to the original vendor for $50,000 at the end of five years.

Purchase of the equipment would be financed by a 5 year fixed rate bank loan at an interest rate of 6%.

A manager already employed by the company would be moved from their current position to manage production of the new lawnmower. Their original position would be filled by a new recruit on a fixed annual salary of $35,000.

Which of the following statements is NOT correct?

Annelle · Accepted Answer

C) The interest costs on the bank loan are a relevant cash flow in the decision.

Annelle · Answer

A) If the lawnmower is a failure then management can terminate the project early and sell the equipment, giving them an abandonment option.

Annelle · Answer

B) The salary of the replacement manager is a relevant cash flow in the decision.

Annelle · Answer

D) Launching a new lawnmower gives an opportunity to launch more new versions and provides a follow-on option.