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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Definitions:

Glucose Utilization

The process by which cells absorb and convert glucose into energy for cellular functions.

Obesity

A medical condition characterized by excess body fat that poses a risk to health.

Alzheimers

A progressive neurological disorder characterized by memory loss, cognitive decline, and personality changes, caused by the accumulation of amyloid plaques and neurofibrillary tangles in the brain.

Metabolic Changes

Alterations in the body's chemical processes that convert food into energy, which can affect health and bodily functions.