A Firm Is Considering a Project That Has Cash Flows

question 10

Multiple Choice

A firm is considering a project that has cash flows indexed to the consumer price index.What discount rate should be used?

• A)Nominal discount rate
• B)Yield to maturity
• C)Change in consumer price index
• D)A rate that uses the consumer price index in its measure

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Definitions:

Absorption Costing

A pricing strategy that incorporates all expenses associated with production - including raw materials, workforce wages, and both fluctuating and constant factory overheads - into a product's cost.

Period Cost

Expenses directly tied to time that are not directly tied to the production process, such as administrative expenses.

Variable Costing

A costing method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product costs.

Period Cost

Expenses that are not directly tied to the production process and are expensed in the period they are incurred, such as selling and administrative expenses.