Assume the Following: (1)A Firm Is Considering Two Projects,one with a 5-Year

question 53

True/False

Assume the following: (1)A firm is considering two projects,one with a 5-year life and the other with a 10-year life;(2)the cash flows of the two projects are equally risky by all definitions of the word "risky";(3)the company uses 40 percent debt and 60 percent equity to finance the projects;(4)the debt used to finance any given project has a maturity equal to the life of the project;and (5)the term structure of interest rates has a sharp upward slope.This would suggest,other things held constant,that a lower discount rate should be used to find the NPV for the 5-year project than for the 10-year project.

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Definitions:

Long Run

A period of time sufficient for all markets to adjust to certain conditions, allowing for full economic analysis or impact assessment.

Compensating Differential

Additional payment or benefits granted to employees to offset unpleasant aspects of a job or differences in job desirability.

Pollution Free

A condition or process that does not emit harmful pollutants into the environment.

Housing Prices

The monetary value attributed to residential dwellings, often influenced by location, size, amenities, and market conditions.