A Major Forest Products Company with a Cost of Capital

question 15

Multiple Choice

A major forest products company with a cost of capital of 12% has raised $15 million in financing and is considering three projects that are divisible, are not mutually exclusive and will have no residual value at the end of their 10 year term. Project A will cost a company $12 million providing $2.45 million in annual income before depreciation. Project B, costing $10.8 million, has annual projected savings before depreciation of $1.8 million. Project C costs $7.3 million and will bring in $1.7 million annually before depreciation. Assuming markets operate in the theoretical Modernist manner, if the company expects to earn a 12% return on their investments, in which project(s) should the company invest?

• A) All three projects.
• B) All of C and 60% of A
• C) B only
• D) All of A and all of C
• E) All of B and 84% of C

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Definitions:

Psychology

the scientific study of the human mind and its functions, especially those affecting behavior in a given context.

Threats

Potential sources of harm or adverse effects to something or someone.

Tension

The state of being stretched tight or mental or emotional strain.

Common Ground

Values and goals that the communicator and audience share.