You Are Considering a Project That Has Been Assigned a Discount

question 78

Multiple Choice

You are considering a project that has been assigned a discount rate of 8 percent.If you start the project today,you will incur an initial cost of $480 and will receive cash inflows of $350 a year for three years.If you wait one year to start the project,the initial cost will rise to $520 and the cash flows will increase to $385 a year for three years.What is the value of the option to wait?

• A)$15.23
• B)$17.08
• C)$18.67
• D)$20.20
• E)$50.20

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Definitions:

Price Drop

A decrease in the market price of a good or asset, usually driven by changes in demand, supply, or broader economic factors.

Consumer Price Index

An index measuring the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Basket

A term used in finance to refer to a collection of investments, commodities, or currencies held together.

CPI

Consumer Price Index, a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.