Question
1.Elkins Co. is considering an investment in equipment for a new product line with a cost of $48,625, a terminal value of $6,283, and a
1.Elkins Co. is considering an investment in equipment for a new product line with a cost of $48,625, a terminal value of $6,283, and a useful life of 5 years. The project will provide an annual contribution margin of $12,500. The required rate of return is 12%. Ignore income taxes. This project is:
a | Unacceptable, because it earns a rate below 12%. |
b | Acceptable, because it has a positive NPV. |
c | Unacceptable, because it has a 0 NPV. |
d | Acceptable, because it earns exactly 12%. |
2.A firm is currently buying a part at a cost of $12 each. It is considering buying a machine that will produce the part at a variable cost of $8. Each unit of input produces the part plus a by-product, which is sold for $1. The machine will cost $40,000 and will have a useful life of 5 years. The firm requires an 8% return. What annual volume is necessary to justify making the investment? Ignore income taxes.
a | 2,558 units |
b | 3,198 units |
c | 12,792 units |
d | 8,000 units |
3.The payback period is deficient as a decision criterion for capital projects because it: I. Disregards relative profitability II. Ignores income beyond the payback period III. Does not take into account the time value of money
a | I only |
b | II only |
c | III only |
d | I, II, and III |
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