When Richard Evaluated a Capital Budgeting Project⎯a New Machine Needed

question 75

Multiple Choice

When Richard evaluated a capital budgeting project⎯a new machine needed to manufacture inventory⎯using his firm's required rate of return,he discovered that the project's net present value (NPV) is negative.Based on this information,which of the following must be correct?

• A) The project's internal rate of return is also negative.
• B) The project's discounted payback period is greater than its economic life.
• C) As long as the new machine's initial investment outlay is fairly low,the firm should purchase if it is used to replace an older machine that is required to produce inventory.
• D) The project's traditional payback period must be greater than the maximum payback period that the firm has established.
• E) Two or more of these scenarios must be correct.

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Definitions:

Fixed Cost

Costs that remain unchanged regardless of the level of production or sales activities within a certain range and period.

Variable Cost

Costs that vary directly with the level of production or service, such as materials and labor.

Traditional Format

A foundational approach to accounting and finance that emphasizes historical cost accounting, generally accepted accounting principles (GAAP), and the use of financial statements.

Contribution Format

The contribution format is an income statement presentation that separates fixed costs from variable costs, highlighting the contribution margin.