Question

An example of a contingent product is: Select one: O A. choosing between one of two manufacturing sites. O B. building a new manufacturing plant with optional waste recycling. C. adding manufacturing capacity to a plant. D. None of the above.

Answer 1

Solution:

a) A contingent good is are a type of future goods where the acquisition of the goods by the seller depends upon certain contingencies that may or may not happen.

Option1 : Choosing between two manufacturing sites .. there is no condition as such in choosing between the two sites , one may chose either of them but no condition is mentioned as such.

Option2: Building a new manufacturing plant with an optional waste recycling is the right answer as the waste cycling plant comes into picture only if there is a waste generation from the facility.

Option3 : Adding manufacturing capacity to a plant has no condition embedded ie. it is implied that for a plant manufacturing capacity will be added automatically.

Option 4: None of the above is automatically incorrect.

b) For projects with high amount of cash flows in the early years of existence presents better NPV as the time increases the discounting factor increases and hence the PV of the future cash flows.

Project B has higher cash flows of $4000, $3000, $2000, $1000, in the first and the second year and hence will have the higher NPV than the project A which have flows such as $1000, $2000, $3000, $4000 which have higher amounts later in the life of the project.

Option A: Both have same NPV , which is not correct as we just concluded B have a higher NPV.

Option B: Project B .. is the right answer

Option C: Project A … Is not as we just explained.

Option D: Cannot be determined … we can make out about the NPV by just looking at the amounts and the timings of the cash flows.