Assume That a Firm Is Considering Building a Factory That

question 112

Multiple Choice

Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides
That it should:

• A)not build because the rate of return on the factory is only 6 percent.
• B)not build because the rate of return on the factory is only 12 percent.
• C)build because the rate of return on the factory is 30 percent.
• D)build because the rate of return on the factory is 35 percent.

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Definitions:

RRSP

Registered Retirement Savings Plan, a Canadian account for holding savings and investment assets, with certain tax benefits.

Compounded Semi-annually

The technique of twice yearly adding interest to the initial sum of money and to the interest that has previously been compounded.

End-of-quarter Payments

Payments made at the end of each quarter in a financial year, often related to dividends, loans, or leases.

Compounded Monthly

A method of calculating interest where the interest amount is added to the principal balance each month, accelerating the growth of the investment.