Sigma Is Thinking About Purchasing a New Clam Digger for $14,000

question 75

Multiple Choice

Sigma is thinking about purchasing a new clam digger for $14,000. The expected net cash flows resulting from the digger are $9,000 in year 1, $7,000 in the 2nd year, $5,000 in the 3rd year, and $3,000 in the 4th year. Should Sigma purchase this digger if its cost of capital is 12%?

• A) Yes, NPV = $3,176
• B) Yes, NPV = $5,084
• C) Yes, NPV = $16,605
• D) Yes, NPV = $19,084

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Definitions:

Perfectly Competitive Market

A market structure characterized by many buyers and sellers, identical products, and no barriers to entry or exit, leading to efficient price determination.

Short Run

A period in which at least one factor of production is fixed and cannot be changed.

Purely Competitive Industry

A market structure characterized by many small firms producing identical products, with no single firm able to influence market prices.