California Mining Is Evaluating the Introduction of a New Ore

question 62

Multiple Choice

California Mining is evaluating the introduction of a new ore production process. Two alter¬natives are available. Production Process A has an initial cost of $25,000, a 4-year life, and a $5,000 net salvage value, and the use of Process A will increase net cash flow by $13,000 per year for each of the 4 years that the equipment is in use. Produc¬tion Process B also requires an initial invest¬ment of $25,000, will also last 4 years, and its expected net salvage value is zero, but Process B will increase net cash flow by $15,247 per year. Management believes that a risk-adjusted dis¬count rate of 12 percent should be used for Process A. If California Mining is to be indifferent between the two processes, what risk-adjusted dis¬count rate must be used to evaluate B?

• A) 8%
• B) 10%
• C) 12%
• D) 14%
• E) 16%

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Definitions:

Discontinuous Innovation

Innovation that represents a significant leap forward, creating new markets or drastically changing the performance and usage of products within existing markets.

Multitouch Functions

Features of devices that recognize and respond to simultaneous touches and gestures on the display surface.

Tracking Mouse

A technology or method used to monitor and analyze the movement and clicks of a mouse by a computer user, often to improve user experience or for research purposes.

Dynamically Continuous Innovation

Innovations that represent a significant change to an existing product or market but do not create new categories, often involving technological advancements.