Assume That Your Firm Has a Potential Investment Project Which

question 54

Multiple Choice

Assume that your firm has a potential investment project which generates a return of 15% and has a cost of $200,000. Assume further that your firm has $200,000 of retained earnings and that the market interest rate is 10%. In this case, your firm should

• A) loan the retained earnings out at 5%.
• B) loan the retained earnings out at 10%.
• C) loan the retained earnings out at 15%.
• D) invest the $200,000 of retained earnings in the project.

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Definitions:

Profitability Index

A calculation used to assess the desirability of an investment, calculated as the present value of future cash flows divided by the initial investment cost.

Internal Rate Of Return

A financial metric used to estimate the profitability of potential investments by calculating the discount rate that makes the net present value of all cash flows equal to zero.

Discounted Cash Flow

A financial analysis technique that estimates the value of an investment based on its expected future cash flows, discounted back to their present value.