The Oneonta Chemical Company Is Evaluating Two Mutually Exclusive Pollution

question 80

Multiple Choice

The Oneonta Chemical Company is evaluating two mutually exclusive pollution control systems.Since the company's revenue stream will not be affected by the choice of control systems,the projects are being evaluated by finding the PV of each set of costs.The firm's required rate of return is 13 percent,and it adds or subtracts 3 percentage points to adjust for project risk differences.System A is judged to be a high-risk project (it might end up costing much more to operate than is expected) .The appropriate risk-adjusted discount rate that should be used to evaluate System A is

• A) 10%;this might seem illogical at first,but it correctly adjusts for risk where outflows,rather than inflows,are being discounted.
• B) 13%;the firm's required rate of return should not be adjusted when evaluating outflow only projects.
• C) 16%;since A is more risky,its cash flows should be discounted at a higher rate,because this correctly penalizes the project for its high risk.
• D) Somewhere between 10% and 16%,with the answer depending on the riskiness of the relevant inflows.
• E) Indeterminate,or,more accurately,irrelevant,because for such projects we would simply select the process that meets the requirements with the lowest required investment.

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Definitions:

Least Squares Regression

A statistical method used to determine the line of best fit by minimizing the sum of the squares of the vertical distances of the points from the line.

Calories

Units of energy measurement used to quantify the energy that foods provide to the body.

Sugar

A sweet crystalline substance obtained primarily from sugarcane and sugar beet, used as a sweetener in food and drink.

Slope

The rate at which a dependent variable changes with respect to an independent variable in a linear relation.