When the Costs of an Investment Come Before That Investment's

question 102

Multiple Choice

When the costs of an investment come before that investment's benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors?

• A) It will make it more attractive, since it will increase the investment's net present value (NPV).
• B) It will make it more attractive, since it will decrease the investment's net present value (NPV).
• C) It will make it less attractive, since it will increase the investment's net present value (NPV).
• D) It will make it less attractive, since it will decrease the investment's net present value (NPV).

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Definitions:

Fixed Overhead

A set of costs that do not vary with production volume, including salaries, rent, and insurance.

Sales Commission

Compensation paid to sales employees as a percentage of the sales they generate, meant to incentivize higher sales.

Incremental Analysis

A decision-making tool used in finance and accounting to determine the cost and benefit changes resulting from a specific business decision.

Variable Manufacturing Cost

This is a subset of variable costs, referring specifically to costs that fluctuate with manufacturing output, such as raw materials and direct labor costs.