Should Tangshan Mining Company Accept a New Project If Its

question 15

Multiple Choice

Should Tangshan Mining company accept a new project if its maximum payback is 3.5 years and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3, and $1,800,000 in year 4?

• A) Yes, since the payback period of the project is less than the maximum acceptable payback period.
• B) No, since the payback period of the project is more than the maximum acceptable payback period.
• C) Yes, since the risk exposure of the project is less than the maximum acceptable risk exposure.
• D) No, since the risk exposure of the project is more than the maximum acceptable risk exposure.

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Definitions:

Variable Costs

Costs that change in proportion to the level of activity or volume of production in a business.

Pretax Income

The amount of income that a company earns before any taxes are deducted.

Variable Cost

Costs that vary in direct proportion to changes in the level of production or sales activity.

Fixed Costs

Costs that do not fluctuate with the level of production or sales activity, such as rent, salaries, and insurance premiums, remaining constant regardless of business volume.