You Borrow $10,000 at an Interest Rate of 5% to Open

question 23

Multiple Choice

You borrow $10,000 at an interest rate of 5% to open Movies Galore, a DVD rental store. You will earn an economic profit if

• A) the return on your investment is between 0 and 5%.
• B) the return on your investment is 5%.
• C) the return on your investment is greater than 5%.
• D) the return on your investment is 10% or greater.

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Definitions:

Present Value

The value now of a given amount to be paid or received in the future, assuming compound interest.

Interest Rate

The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

Discounted Cash Flow

Discounted Cash Flow is a valuation method used to estimate the attractiveness of an investment opportunity, based on projections of future cash flows adjusted for time value of money.

Time Value

The concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.