Calco Is a Multi-Divisional Firm with a Weighted Cost of Capital

question 17

Multiple Choice

Calco is a multi-divisional firm with a weighted cost of capital of 14 percent and a risk-adjusted discount rate for its can division of 17 percent. A planned expansion in the can division requires a net investment of $170,000 and results in expected cash inflows of $42,000 a year for seven years. Should Calco invest in this expansion?

• A) Yes, since NPV = $10,096
• B) Yes, since NPV = $9,896
• C) No, since NPV = -$5,276
• D) No, since NPV = -$9,896

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Definitions:

Income Elasticity

A measure of how the demand for a good or service changes in response to changes in consumers' income.

Quantity Demanded

The total amount of a good or service that consumers are willing and able to purchase at a specific price level.

Inelastic Demand

A situation where the demand for a good or service does not significantly change in response to price changes.

Midpoint Method

A technique used in economics to calculate the percentage change between two points, providing a more accurate measure than simple percentage calculations.