A project under consideration has a net present value of $5,000 for a required i

Question

A project under consideration has a net present value of $5,000 for a required investment of $30,000. There are no other investment options at this time. However, the assumed discount rate used to calculate the net present value is 10%.

On the basis of this information alone, this project should

A.

definitely be rejected because $10,000 is only 17% of $60,000.

B.

be rejected on the basis that the project loses $50,000.

C.

be accepted if the cost of capital is greater than or equal to 20 percent.

D.

probably be approved since the net present value is greater than zero.

Tinley Division has the capacity to make 1,500 units of an intermediate good that is sold both internally and on the open market for a price of $28 each. To make the product, Tinley incurs $6 of variable cost per unit and $12 of fixed costs per unit.

What is the minimum price Tinley would accept for an internal transfer of 1,000 units of the product if the division is operating at 50% capacity?

A.

$12.00 per unit

B.

$ 6.00 per unit

C.

$18.00 per unit

D.

$28.00 per unit

A.

definitely be rejected because $10,000 is only 17% of $60,000.

B.

be rejected on the basis that the project loses $50,000.

C.

be accepted if the cost of capital is greater than or equal to 20 percent.

D.

probably be approved since the net present value is greater than zero.

Explanation / Answer

In first question:

Option D is correct i.e. probably be approved since the net present value is greater than zero. Since, here given that net present value is possitive hence project is accepted.

since remaining all options are incorrect.

In second question:

Option B is correct i.e. $6.00 per unit

since, here division is operating at 50% capacity only, if it is operating at 100% capacity then we have to consider total variable and total fixed costs.

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