A $25 Investment Produces $27

question 44

Multiple Choice

A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is true?

• A) NPV is positive if the required return is less than 10%.
• B) NPV is negative if the required return is less than 10%.
• C) NPV is zero if the required return is equal to 10%.
• D) Both NPV is positive if the required return is less than 10%; and NPV is zero if the required return is equal to 10%.
• E) None of these.

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Definitions:

Productive Capacity

The maximum output a company can produce using its existing resources in a given period, without sacrificing quality.

Units-of-Activity Method

A depreciation method that allocates the cost of an asset over its useful life based on units of production or usage rather than time.

Depreciation Expense

The allocation of the cost of a tangible asset over its useful life, representing how much of the asset's value has been used up during the period.

Straight-Line Method

A technique for estimating an asset's depreciation, where it's presumed the asset depreciates uniformly each year throughout its productive lifespan.