Mae Chen, Manager of Chen Fabrics, Is Comparing Two Assumptions

question 85

Multiple Choice

Mae Chen, manager of Chen Fabrics, is comparing two assumptions about the terminal cash flow arising from an expansion project. The Year 7 cash flow is $250,000. One assumption is that subsequent cash flows are constant. An equally valid assumption is that subsequent cash flows will grow at a four percent rate. If Chen Fabrics' cost of capital is 11 percent, what is the difference in the calculation of the project's terminal value?

• A)Under $25,000
• B)Between $250,000 and $500,000
• C)Between $500,001 and $1,000,000
• D)Over 1,000,000

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Definitions:

Test Statistic

A standardized value that is calculated from sample data during a hypothesis test. It's used to determine whether to reject the null hypothesis.

Two-tail Test

A statistical test where the critical area of a distribution is two-sided and tests whether a sample is greater than or less than a certain range of values.

Sample Variances

A measure of the dispersion or variability within a sample data set, calculated as the sum of squared deviations from the mean, divided by the number of observations minus one.

Sample Sizes

The number of observations or datapoints collected in a sample, which can affect the accuracy and reliability of statistical analyses.