California Mining Is Evaluating the Introduction of a New Ore

question 62

Multiple Choice

California Mining is evaluating the introduction of a new ore production process. Two alter¬natives are available. Production Process A has an initial cost of $25,000, a 4-year life, and a $5,000 net salvage value, and the use of Process A will increase net cash flow by $13,000 per year for each of the 4 years that the equipment is in use. Produc¬tion Process B also requires an initial invest¬ment of $25,000, will also last 4 years, and its expected net salvage value is zero, but Process B will increase net cash flow by $15,247 per year. Management believes that a risk-adjusted dis¬count rate of 12 percent should be used for Process A. If California Mining is to be indifferent between the two processes, what risk-adjusted dis¬count rate must be used to evaluate B?

• A) 8%
• B) 10%
• C) 12%
• D) 14%
• E) 16%

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Radical Equation

A mathematical equation that involves a radical, where the variable is inside a root, such as a square root or cube root.

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Pythagorean Theorem

A fundamental relation in Euclidean geometry among the three sides of a right triangle, stating that the square of the hypotenuse is equal to the sum of the squares of the other two sides.

Radical Equation

An equation in which the variable is contained within a radical symbol or has a radical expression with the variable.