If an Investment Costing $2000 Is Expected to Generate Real

question 47

Multiple Choice

If an investment costing $2000 is expected to generate real cash flows of $900 p.a.for three years and prices are expected to increase at a rate of 10% p.a. ,what is the real required rate of return if the nominal cost of capital is 15%?

• A)6%
• B)5%
• C)1.05%
• D)4.55%

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Definitions:

Risk Of Obsolescence

The risk that a product or service becomes outdated and undesired due to new technologies or changes in consumer preferences.

Lessor

The party in a lease agreement who owns the property and grants another party, the lessee, the right to use it for a specific period in exchange for payment.

Lessee

A lessee is an individual or entity that leases an asset or property from another party, known as the lessor.

PV Of CCA Tax Shield

The present value of capital cost allowance tax shield, which represents the discounted value of tax savings due to depreciation expenses.