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A Company Has an Investment Project That Will Cost $2

question 170

Essay

A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. What interest rate represents the cutoff between profitability and nonprofitability for this project?


Definitions:

Compensating Balance

A requirement by some banks requiring depositors to maintain minimum cash balances in their bank accounts.

Petty Cash Fund

A special cash fund to pay relatively small amounts.

Bank Checking Account

A bank account that allows individuals and businesses to deposit money and withdraw funds, which can be accessed using checks, automated teller machines (ATMs), and electronic debits.

Cash Equivalents

Highly liquid investments that are usually reported with cash on the balance sheet.

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