The Unlimited, a National Retailing Chain, Is Considering an Investment

question 64

Multiple Choice

The Unlimited, a national retailing chain, is considering an investment in one of two mutually exclusive projects. The discount rate used for Project A is 12 percent. Further, Project A costs $15,000, and it would be depreciated using MACRS. It is expected to have an after-tax salvage value of $5,000 at the end of 6 years and to produce after-tax cash flows (including depreciation) of $4,000 for each of the 6 years. Project B costs $14,815 and would also be depreciated using MACRS. B is expected to have a zero salvage value at the end of its 6-year life and to produce after-tax cash flows (including depreciation) of $5,100 each year for 6 years. The Unlimited's marginal tax rate is 40 percent. What risk-adjusted discount rate will equate the NPV of Project B to that of Project A?

• A) 15%
• B) 16%
• C) 18%
• D) 20%
• E) 12%

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Definitions:

Linear Model

A linear model is a mathematical model that approximates the relationship between a dependent variable and one or more independent variables using a linear equation.

Scatterplot

A statistical graph type that illustrates the association between two variables by displaying data values for a dataset.

Regression Analysis

A technique in statistics for investigating how a dependent variable is related to one or more independent variables.

Slope

The measure of steepness or incline, often represented as a ratio between rise over run in a linear equation.