You Are Considering a New Project That Will Require an Initial

question 58

Multiple Choice

You are considering a new project that will require an initial buildup of raw materials inventory. The expected life of the project's equipment is seven years. If all goes as you expect, you will replace
The equipment at the end of the seven years. If not, you will terminate the project. You currently
Believe there is a 50-50 chance of either occurrence. How should you treat the raw material
Inventory in year seven of your present analysis and why?

• A) Treat half of it as a cash inflow because there is a 50% chance the project will terminate then.
• B) Treat it as a cash outflow because it is expected that the machines will be replaced.
• C) Treat it as a cash inflow because the replacement of the machines becomes a new capital budgeting decision at that point.
• D) Treat it as both a cash inflow and outflow, net effect zero.
• E) Treat half as a cash inflow in year seven, but also treat only half as a cash outflow at the beginning of the project.

---

Definitions:

Greek Antiquity

The period in Greek history lasting from the 8th century BCE to the end of antiquity, noted for its significant contributions to art, philosophy, politics, and science.

Jean-Auguste-Dominique Ingres

A French Neoclassical painter known for his technical precision and strong emotion, as seen in works like "The Grande Odalisque".

Hudson River School

A mid-19th century American art movement embodied by a group of landscape painters influenced by romanticism, focusing on the Hudson River Valley.

Landscape Painting

A genre of painting that depicts natural scenery such as mountains, valleys, trees, rivers, and forests, emphasizing the beauty of the natural world.