Tom's Donuts Can Invest in a New Espresso Machine That

question 197

Multiple Choice

Tom's Donuts can invest in a new espresso machine that costs $300 and will yield expected profits of $200 each year for two years. At lower interest rates, the present discounted value of profits from the investment

• A) increases.
• B) decreases.
• C) is unchanged.
• D) is indeterminate from the given information.

---

Definitions:

Discount Rate

The rate used to calculate the present value of future cash flows.

Conversion Premium

The additional cost over the par value at which a convertible security, like a bond or preferred stock, can be converted into common stock.

Pure Discount Bond

A type of bond that is issued at a discount to its face value and pays no interest but instead pays the face value at maturity.

Total Assets

The sum of all assets owned by a company, including cash, investments, property, and other resources.