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Question
California Mining is evaluating the introduction of a new ore production process. Two alternatives 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. Production Process B also requires an initial investment 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 discount rate of 12 percent should be used for Process A. If California Mining is to be indifferent between the two processes, what risk-adjusted discount rate must be used to evaluate B?
a. 8%
b. 10%
c. 12%
d. 14%
e. 16%
Answer
This answer is hidden. It contains 1 characters.
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