North West Mining Is Evaluating the Introduction of a New

question 98

Multiple Choice

North West Mining is evaluating the introduction of a new ore production process.Two alternatives are available.Production Process A has an initial cost of R25,000, a 4-year life, and a R5,000 net salvage value, and the use of Process A will increase net cash flow by R13,000 per year for each of the 4 years that the equipment is in use.Production Process B also requires an initial investment of R25,000, will also last 4 years, and its expected net salvage value is zero, but Process B will increase net cash flow by R15,247 per year.Management believes that a risk-adjusted discount rate of 12 percent should be used for Process A.If California Mining is to be indifferent between the two processes, what risk-adjusted discount rate must be used to evaluate B?

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

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