A Firm Is Considering Investment in a Capital Project Which

question 24

Multiple Choice

A firm is considering investment in a capital project which is described below. The firm's cost of capital is 18 percent and the riskfree rate is 6 percent. The project has a risk index of 1.5. The firm uses the following equation to determine the risk adjusted discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital - Rf)
$$\begin{array} { l r } \text { Initial Investment } & \$ 1,000,000 \\\hline \text { Year } & \text { Cash Inflow } \\\hline 1 & \$ 500,000 \\2 & 500,000 \\3 & 500,000\end{array}$$
-The net present value of the project when adjusting for risk is____________

• A) $105,000
• B) $87,000
• C) $0
• D) -$9,500

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Definitions:

Phony Commissions

Fraudulent or deceptive act of generating illegitimate earnings through fabricated sales or referrals, often involving unethical business practices.

Robinson-Patman Act

In the United States, a federal statute that disallows any anticompetitive behavior by producers, with an emphasis on the rejection of discriminatory pricing.

Treble Damages

A type of compensation awarded in a lawsuit where the damages are tripled as a punitive measure against the defendant.

Clayton Act

A U.S. antitrust law enacted in 1914, intended to supplement the Sherman Act by addressing specific practices that could lead to monopolies or restrain trade.