Suppose the Firm's Required Rate of Return Is Stated in Nominal

question 85

Multiple Choice

Suppose the firm's required rate of return is stated in nominal terms,but the project's expected cash flows are expressed in real dollars.In this situation,other things held constant,the calculated NPV would

• A) Be correct.
• B) Be biased downward.
• C) Be biased upward.
• D) Possibly have a bias,but it could be upward or downward.
• E) More information is needed;otherwise,we can make no reasonable statement.

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Definitions:

Tariff

A tax imposed by a government on imports or exports of goods to regulate trade policies.

Excise Tax

A sales tax levied on a particular good or service; for example, gasoline and cigarette taxes.

Imported Good

A product or service brought into one country from another for use, sale, or consumption.

Comparative Advantage

Economic theory suggesting that a party should specialize in producing and trading goods that it can produce at a lower opportunity cost than others, leading to increased efficiency and profit.