A Project Requires an Initial Investment of $150

question 10

Multiple Choice

A project requires an initial investment of $150.Your research generates the following estimates of revenues and costs:

The cost of capital equals 10%.Assume that the cash flows occur in perpetuity.What does a sensitivity analysis of NPV (without taxes) show? (Answers appear in order: [Pessimistic,Most Likely,Optimistic].)

• A)50,-100,+400
• B)-50,+300,+500
• C)-100,+150,+350
• D)+100,+150,+350

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Definitions:

Returns to Scale

The rate at which output increases as inputs are increased proportionately.

Economies of Scope

Cost advantages companies experience when they increase the variety of products produced, as opposed to increasing the volume of a single product (economies of scale).

Joint Cost Curve

Refers to a graph showing the costs shared by products in the process of being produced together up to a split-off point.

Economies of Scope

Cost advantages that enterprises obtain due to efficient resource utilization in producing a variety of products rather than specializing in a single product.