A Project Has a Net Initial Investment of $500,000 and the Cash

question 7

Multiple Choice

A project has a net initial investment of $500,000 and the cash flows cover five years. The project involves replacing an old machine with a new machine at the same time. Which of the following is true based on the above assumptions, in NPV analysis?

• A) The book value of the old machine is relevant.
• B) Recurring operating cash flows cannot be positive and negative.
• C) Incremental working capital investment is irrelevant.
• D) Any cash received from the disposal of the old machine would be a relevant cash flow for end of year 1.
• E) Errors in forecasting the terminal disposal price of the new machine are seldom critical on long-duration projects.

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Definitions:

DfB

Degrees of Freedom Between groups, referring to the number of independent values in the calculation of variance between the different groups under study.

DfWG

Degrees of Freedom Within Groups, a statistical concept used in variance analysis to describe the number of independent pieces of information that went into the estimate of variability.

Critical Value

The threshold value that a test statistic must exceed to reject the null hypothesis in a statistical test.

Df

Abbreviation for degrees of freedom, indicating the number of values in a final calculation of a statistic that are free to vary.