CHOOSE THE CORRECT ANSWER

1. ABC and Sons, Inc. is an agri-company who processes soybeans that it purchases from farmers. Soybeans are processed in batches. A batch of soybeans costs

$50 per unit to buy from farmers

$15 per unit to crush in the company's plant.

An intermediate product, bean oils, emerges from the crushing process in addition to the soy protein. The bean oil can be sold as is for $40 or processed further for $25 to make refined food oil, an end product that is sold for $60. How much profit (loss) does the company make by processing bean oil into refined food oil rather than selling it as is?

A. Loss of $5 per batch

B. Profit of $5 per batch

C. Loss of $30 per batch

D. Gain of $20 per batch

2. The project profitability index and net present value

A. will always result in the same preference ranking for investment projects.

B. will sometimes result in different preference rankings for investment projects.

C. will always result in different preference rankings for investment projects.

D. will be most helpful when the present value of cash outflows is more than the present value of cash inflows.

3. Some investment projects require that a company increase its working capital. Under the net present value method, the investment and eventual recovery of working capital should be treated as:

A. an initial cash outflow.

B. a future cash inflow.

C. both an initial cash outflow and a future cash inflow.

D. irrelevant to the net present value analysis.