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:

Cash-Basis Expenses

Expenses recorded when cash is actually paid out, under the cash basis of accounting, as opposed to the accrual basis which recognizes expenses when they are incurred.

Warranty Expenses

Costs recognized by companies to cover repairs or replacements for customers as part of product warranty agreements.

Inventory Purchases

The buying of goods to be sold in the normal course of business operations.

Sustainable Income

Revenue that can be maintained for the foreseeable future without diminishing resources or opportunities.