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:

Abandon

To leave something behind or give up on it completely without any intention of returning or continuing.

Behaviourism

A behavioral science method focusing on the examination of behaviors that can be seen and the environmental factors that influence them.

Rise of Animal Research

The historical increase in the use of animals for scientific research to understand human diseases, behaviors, and biology.

Behaviourist

A psychologist or researcher who studies behaviour based on observable actions and reactions, often excluding mental states from their analyses.