Question
Your company is interested in having a new facility constructed. The contractor expects that it will take approximately 3 years to complete the building. The contractor has offered you three payment plans for the building. They are as follows:
|
Time
|
Plan 1
|
Plan 2
|
Plan 3
|
|
Today
|
$300,000
|
$1,035,000
|
$950,000
|
|
1 year from now
|
$1,300,000
|
$1,035,000
|
$0
|
|
2 years from now
|
$1,300,000
|
$1,035,000
|
$1,600,000
|
|
3 years from now
|
$1,300,000
|
$1,035,000
|
$1,600,000
|
The CFO of your company has asked you to provide recommendation concerning which payment plan to accept. What is your recommendation? Assume your weighted-average cost of capital is 10%.
Question
List and describe four "red flags" that may indicate you should consider revising your overhead allocation system.
Question
a) Describe the differences between unit-related, batch-related, and product-sustaining activities. Give one example of each type of activity.
b) Describe the difference between transaction drivers and duration drivers. When would one type be preferred over the other?