If You Use Futures Prices to Estimate the Cash Flows

question 5

Multiple Choice

If you use futures prices to estimate the cash flows of a project, which discount rate should you use?

• A)The cost of capital for the firm only
• B)The cost of capital for the firm and the cost of capital for the project
• C)The risk-free rate only
• D)The cost of capital for the project only

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Definitions:

Relevant Range

The range of operating activity within which the assumptions about fixed and variable cost behaviors remain valid.

Fluctuate

To change or vary irregularly in number, amount, volume, or intensity.

Committed Fixed Cost

Long-term fixed costs that cannot be easily changed and are typically tied to the investment in facilities, equipment, and basic organizational structure.

Long-Term Equipment Lease

A long-term equipment lease is a contractual agreement allowing a business to use equipment for a prolonged period in exchange for regular payments.