California Mining Is Evaluating the Introduction of a New Ore

question 62

Multiple Choice

California Mining is evaluating the introduction of a new ore production process. Two alter¬natives are available. Production Process A has an initial cost of $25,000, a 4-year life, and a $5,000 net salvage value, and the use of Process A will increase net cash flow by $13,000 per year for each of the 4 years that the equipment is in use. Produc¬tion Process B also requires an initial invest¬ment of $25,000, will also last 4 years, and its expected net salvage value is zero, but Process B will increase net cash flow by $15,247 per year. Management believes that a risk-adjusted dis¬count rate of 12 percent should be used for Process A. If California Mining is to be indifferent between the two processes, what risk-adjusted dis¬count rate must be used to evaluate B?

• A) 8%
• B) 10%
• C) 12%
• D) 14%
• E) 16%

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Definitions:

Cash Cycle

The period between the outlay of cash for goods/services and the return of cash through customer payments, reflecting the liquidity and efficiency of a company.

Accounts Payable Period

The average time it takes for a business to pay off its suppliers after receiving inventory or services.