Why should firms that own and operate multiple businesses that have different risk characteristics
use business-specific, or divisional costs of capital?
A) Not all divisions have equal risk and the firm might accept projects whose returns are higher
than are deemed appropriate.
B) Not all lines of business have equal risk and it is likely that the firm will accept projects whose
returns are unacceptably low in relation to the risk involved.
C) Not all business divisions have equal risk and the firm will likely become less risky in the
future.
D) Use of the same weighted average cost of capital for all divisions may result in too much
money being allocated to the least risky division.
Question 2
Lasalle Industries is considering the purchase of a new machine that will cost 250,000, plus an
additional 10,000 to ship and install. The new machine will have a 5-year useful life and will be
depreciated to zero using the straight-line method.
The machine is expected to have a salvage
value of 30,000 at the end of year five. LaSalle's income tax rate is 40. The additional net working
capital from this project of 50,000 is expected to return to its pre-project level upon termination.
What is the non-operating terminal cash flow of the machine?
A) 68,000 B) -32,000 C) 48,000 D) 80,000
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