The Appropriate Discount Rate to Be Used When Analyzing an Investment

question 157

Multiple Choice

The appropriate discount rate to be used when analyzing an investment project is _______________.

• A) The rate of return that will result in the highest NPV.
• B) The internal rate of return on that investment.
• C) Equal to the cost of capital based on the firm's historical assets.
• D) The rate of return financial markets offer on investments of similar risk.
• E) The rate of interest the firm would pay if it sold bonds.

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Definitions:

Revolving Credit Agreement

A credit arrangement that allows a company or individual to borrow, repay, and borrow again up to a certain credit limit.

Commitment Fee

A fee charged by a bank for guaranteeing to have loanable funds available. The fee is charged on un borrowed amounts up to the maximum of the guarantee. See Revolving credit agreement.

Line of Credit

An arrangement between a financial institution and a customer that establishes a maximum loan balance the borrower can access.

Clean-Up Requirement

A term often used in banking, referring to a requirement that a borrower must pay down a line of credit to zero or to a specific level at least once within a certain period.