If You Are Discounting a Project's Cash Flows Using the Nominal

question 30

Multiple Choice

If you are discounting a project's cash flows using the nominal cost of capital, then that means that you have taken the following into account:

• A) the real rate of return
• B) the expected rate of inflation
• C) both of the above
• D) none of the above

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Definitions:

Maturity Value

For an interest-bearing note, it is the sum of the face value (principal) and the interest dollars: MV = P + I.

360-Day Year

An accounting assumption that simplifies interest calculations by using a year composed of twelve 30-day months.

Leap Years

Years that contain 366 days instead of the usual 365, with an extra day added to February, occurring every four years to maintain the calendar year's alignment with the Earth's revolutions around the Sun.

Interest Computation

The process of calculating the amount of interest due on a loan or investment based on the principal amount, rate, and time.