Reference: 10-13
Jimbob Co Jimbob Co Uses a 10% Discount Rate and the Incremental Cost

question 99

Multiple Choice

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.
-Which statement below is true about the evaluation of an investment having uneven cash flows using the payback method?

• A)It will produce essentially the same results as those obtained through the use of discounted cash flow techniques.
• B)It cannot be done.
• C)It requires the use of a sophisticated calculator or computer software.
• D)It can be done only by matching cash inflows and investment outflows on a year-by-year basis.

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Definitions:

Gestation

The period of development inside the womb from conception until birth.

Birth Weight

The weight of a newborn measured immediately after birth, an important indicator of neonatal health and development.

Gavage-Feeding

The process of feeding a person or an animal through a tube inserted into the stomach, used when oral intake is not possible.

Preterm Newborn

A baby born before 37 weeks of gestation, often requiring specialized care due to underdeveloped organs.