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?
