RainMan Inc

question 6

Multiple Choice

RainMan Inc. is in the business of producing rain upon request. They must decide between two investment projects: a new airplane for seeding rain clouds or a new weather control machine built by Dr. Nutzbaum. The discount rate for the new airplane is 9 percent, while the discount rate for the weather machine is 39 percent (it happens to have higher market risk) . Which investment should the company select and why? (Assume a 0 percent inflation rate and that projected costs do not change over time.)

• A)Airplane, because it has a higher NPV
• B)Weather machine, because it has a higher NPV
• C)Airplane, because it has a higher equivalent annual cash flow
• D)Weather machine, because it has a higher equivalent annual cash flow

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Definitions:

Money Supply

The total amount of monetary assets available in an economy at any specific time, including cash, coins, and balances held in checking and savings accounts.

Open-Market Purchases

Actions by a central bank to buy securities in the open market to increase the money supply.

Bank Deposits

Money placed into banking institutions for safekeeping, which can include savings accounts, checking accounts, and certificates of deposit.

Lending

The act of providing funds to another party with the expectation that the funds will be repaid, often with interest, over a specified period of time.