Use the Information for the Question(s)below

question 68

Multiple Choice

Use the information for the question(s) below.

-An investor has the opportunity to invest in four new retail stores. The amount that can be invested in each store, along with the expected cash flow at the end of the first year, the growth rate of the concern, and the cost of capital is shown for each case. It is assumed each investment will operate in perpetuity after the initial investment. Which investment should the investor choose?

• A)Initial investment: $100 000; Cash flow in year 1: $12 000; Growth Rate: 1.25%; Cost of Capital: 9.0%
• B)Initial investment: $90 000; Cash flow in year 1: $10 000; Growth Rate: 1.50%; Cost of Capital: 9.0%
• C)Initial investment: $80 000; Cash flow in year 1: $8 000; Growth Rate: 1.75%; Cost of Capital: 8.0%
• D)Initial investment: $60 000; Cash flow in year 1: $6 000; Growth Rate: 2.50%; Cost of Capital: 7.5%

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Definitions:

Total Costs

The sum of all costs incurred in the production of goods or services, including both fixed and variable costs.

Marginal Cost Curve

A graphical representation showcasing how the cost of producing one additional unit of a product varies with the quantity of the product produced.

Average Total Cost Curve

A graphical representation that shows the cost per unit of output, calculated by dividing the total cost by the quantity produced.

Average Variable Cost Curve

A graphical representation showing the relationship between a firm's total variable cost per unit of output and the level of output.