The Unlimited, a National Retailing Chain, Is Considering an Investment

question 61

Multiple Choice

The Unlimited, a national retailing chain, is considering an investment in one of two mutually exclusive projects.The discount rate used for Project A is 12 percent.Further, Project A costs R15,000, and it would be depreciated using MACRS.It is expected to have an after-tax salvage value of R5,000 at the end of 6 years and to produce after-tax cash flows (including depreciation) of R4,000 for each of the 6 years.Project B costs R14,815 and would also be depreciated using MACRS.B is expected to have a zero salvage value at the end of its 6-year life and to produce after-tax cash flows (including depreciation) of R5,100 each year for 6 years.The Unlimited's marginal tax rate is 40 percent.What risk-adjusted discount rate will equate the NPV of Project B to that of Project A?

• A) 15%
• B) 16%
• C) 18%
• D) 20%
• E) 12%

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Definitions:

New Buy

Refers to a purchasing situation where a buyer acquires a product or service for the first time, involving more research and decision-making effort.

Buying Center Culture

The set of behaviors, beliefs, and values that influence how a company's purchasing decisions are made.

Consensus

Agreement achieved by a group as a whole, where all members support the decision even if it is not their first choice.

Modified Rebuy

A purchasing situation in which a company buys goods that have been previously purchased but requires some modification or change to specifications, suppliers, or terms.