Generro Company Is Considering the Purchase of Equipment That Would

question 85

Multiple Choice

Generro Company is considering the purchase of equipment that would cost $36,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a desired rate of return of 12%,is the project acceptable?

• A) No,since the negative net present value indicates the investment will yield a rate of return below the desired rate of return.
• B) Yes,since the investment will generate $52,500 in future cash flows,which is greater than the purchase cost of $36,000.
• C) Yes,since the positive net present value indicates the investment will earn a rate of return greater than 12%.
• D) The answer cannot be determined.

---

Definitions:

Expected Return

The probability-weighted average of the possible outcomes.

Risk Premium

The extra return above the risk-free rate that investors require as compensation for the risk of an investment.

Alpha

In investing, alpha is the measure of an investment's return relative to a benchmark index's performance, representing the value that a portfolio manager adds or subtracts from a fund's return.

Beta

A measure of a stock's volatility in relation to the overall market; a beta greater than 1 indicates greater volatility than the market.