You Are Evaluating Two Different Cookie-Baking Ovens

question 53

Multiple Choice

You are evaluating two different cookie-baking ovens.The Pillsbury 707 costs $25,000,has a six-year life,and has an annual OCF (after tax) of −$5,000 per year.The Keebler CookieMunster costs $40,000,has a seven-year life,and has an annual OCF (after tax) of −$500 per year.If your discount rate is 10 percent,what is each machine's EAC?

• A) Pillsbury: −$11,594.94; Keebler: $8,716.22
• B) Pillsbury: −$11,594.94; Keebler: −$9,145.62
• C) Pillsbury: −$10,740.18; Keebler: −$9,145.62
• D) Pillsbury: −$10,740.18; Keebler: −$8,716.22

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Definitions:

Portfolio Beta

A measure of the volatility, or systematic risk, of a portfolio in comparison to the market as a whole, indicating how sensitive the portfolio is to market movements.

Security Market Line

A line that represents the relationship between the risk of an investment and its expected return, used in capital asset pricing model (CAPM) to determine risk-adjusted returns.

Unsystematic Risk

The risk associated with a specific company or industry, also known as "diversifiable risk" or "idiosyncratic risk."

Expected Risk Premium

The additional return over the risk-free rate that investors demand to compensate for the risk of holding a risky asset.