Which One of the Following Is Advised When Evaluating a Capital

question 47

Multiple Choice

Which one of the following is advised when evaluating a capital project in a foreign country if you are concerned about political risk?

• A) The project should be abandoned until this risk disappears.
• B) The project's cost of capital rate should be decreased to offset the perceived risk.
• C) The domestic discount rate should be increased to account for the added risk.
• D) The project cash flows should be decreased to recognize the possibility of bad outcomes.

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Definitions:

Term Structure

The relationship between interest rates or bond yields and different terms to maturity, typically depicted in a yield curve.

Liquidity Premium

The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.

Inflation

An indicator of how quickly the overall price level for goods and services increases, leading to a decrease in buying power.

Inflation Premium

The additional yield that investors demand on securities to compensate for the loss of purchasing power due to inflation.