A Communications Company Installs Cable to Service a New Area

question 108

Multiple Choice

A communications company installs cable to service a new area.They estimate the cost of installing the cable is $17 million,but they will receive a cash flow of $1.4 million per year indefinitely.The net present value (NPV) of this investment at a cost of capital of 6.5% indicates that this is a worthwhile investment.By how much would the cost of capital have to increase for the NPV to be zero?

• A)0.83%
• B)1.74%
• C)3.25%
• D)5.37%
• E)8.24%

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Definitions:

Marginal Cost

The cost incurred by producing one additional unit of a product.

Concave

A shape or curve that is curved inward, resembling the interior of a circle or sphere.

Production Possibilities Frontier

A curve depicting all maximum output possibilities for two goods, given a set of inputs and technology constraints.

Marginal Rate Of Transformation

The rate at which one good must be sacrificed in order to produce an additional unit of another good, assuming efficient use of resources.