Use the Information for the Question(s)below

question 64

Multiple Choice

Use the information for the question(s) below.

-Of the following four mutually exclusive investments, which is the best investment?

• A)Initial investment: $1.1 million; Cash flow in year 1: $160 000; Annual Growth Rate: 2%; Cost of Capital: 9.0%
• B)Initial investment: $1.2 million; Cash flow in year 1: $150 000; Annual Growth Rate: 2%; Cost of Capital: 7.0%
• C)Initial investment: $1.3 million; Cash flow in year 1: $160 000; Annual Growth Rate: 1%; Cost of Capital: 6%
• D)Initial investment: $1.4 million; Cash flow in year 1: $150 000; Annual Growth Rate: 2%; Cost of Capital: 8%

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Definitions:

Diseconomies of Scope

A situation in which a single firm producing multiple products has higher costs than if each product were produced by a separate firm.

Economies of Scale

The cost advantages that enterprises obtain due to their scale of operation, which often leads to a reduction in average cost per unit as scale is increased.

Economies of Scope

Cost advantages that a business experiences by expanding the variety of products or services it offers, leveraging shared operations or resources.

Learning Curve

The graphical representation of how an increase in learning comes from greater experience, leading to reduced costs over time.