Happy Cows Is a Perfectly Competitive Dairy Farm with a 50

question 134

Multiple Choice

Happy Cows is a perfectly competitive dairy farm with a 50 percent chance of a high demand of $5 and a 50 percent chance of a low demand of $4. Free Cows is a perfectly competitive dairy farm with a 50 percent chance of a high demand of $6 and a 50 percent chance of a low demand of $3. Which of the following statements is true?

• A)All else equal, an accurate forecast is more valuable to Happy Cows than Free Cows.
• B)All else equal, neither Free Cows nor Happy Cows can benefit from an accurate forecast.
• C)All else equal, an accurate forecast has the same value to both Free Cows and Happy Cows.
• D)All else equal, an accurate forecast is more valuable to Free Cows than Happy Cows.

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Definitions:

Net Present Value

A valuation method that calculates the present value of future cash flows generated by an investment, minus the initial investment cost.

Cash Flows

The movement of money into and out of a business, project, or financial product, considered essential for assessing the health and sustainability of an entity.

Return on Investment

A financial metric used to evaluate the efficiency or profitability of an investment, calculated by dividing the profit from an investment by the cost of the investment.

Capital Budgeting

The process businesses use to evaluate and select long-term investments such as new machinery, replacement machinery, new plants, new products, and research development projects.