A Company Is Contemplating Investing in a New Piece of Manufacturing

question 87

Multiple Choice

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows generated by the project is $145,000. Should they invest in this project?

• A) yes, because the rate of return on the project exceeds the desired rate of return used to calculate the present value of the future cash flows.
• B) no, because the rate of return on the project is less than the desired rate of return used to calculate the present value of the future cash flows.
• C) no, because net present value is +$5,000
• D) yes, because the rate of return on the project is equal to the desired rate of return used to calculate the present value of the future cash flows.

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Definitions:

Financial Advantage

The benefit gained in financial terms from a particular action or situation, often measured in terms of profit, savings, or net worth.

Practical Capacity

The maximum output that a company can produce in a real-life scenario, taking into account planned maintenance, breaks, and other non-operational activities.

Variable Cost

A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit.

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance.