RonCo Company Is Considering a Recycling Project

question 25

Multiple Choice

RonCo Company is considering a recycling project.The project will result in a significant decrease in their garbage disposal costs.The acquisition cost of the recycling machine is $100,000.The present value of the depreciation tax shield (CCA) is $35,000 and the machine is expected to have a zero salvage value.The firm can lease the machine instead of buying it - the present value of the before-tax lease payments is $60,000 and the present value of the tax savings from the lease payments is $20,000.Should the firm lease the recycling machine and why or why not?

• A) Yes, the NPV of leasing is $60,000.
• B) Yes, the NPV of leasing is $25,000.
• C) No, the NPV of leasing is −$40,000.
• D) No, the NPV of leasing is −$175,000.

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Definitions:

Reactor Strategy

A reactor strategy is a type of business approach where an organization reacts to external forces and changes without a consistent strategic plan, often in response to immediate challenges rather than long-term goals.

Competitive Pressures

The influence exerted by competing organizations in a market, compelling businesses to continually improve and innovate.

Survive

To continue to live or exist, especially in spite of danger or hardship.

Porter's Generic Strategies

A framework devised by Michael Porter that outlines three strategic options for businesses to gain competitive advantage: Cost Leadership, Differentiation, and Focus.