C) nominal cash flows should be discounted with real rates. Project A has an IRR of 20% while Project B has, an IRR of 30%. Find GCSE resources for every subject. Get step-by-step explanations, verified by experts. D) the rate of inflation must be positive If this reduction is, permanent and the cost of capital is 13%, how does the net working capital change affect company, value? Learn vocabulary, terms, and more with flashcards, games, and other study tools. This preview shows page 6 - 8 out of 9 pages. 44. investment can occur now or at some future point. cost of living adjustments. | You should neither subtract the debt proceeds from the, project's required investment, nor would you recognize the interest and principal payments on the debt, A new inventory system will immediately reduce inventory levels by $100,000. NEW! C) equal to the real interest rate minus the rate of inflation. Which one of the following changes will increase the NPV of a project? What is the effect of using MACRS rather than strait line depreciatin ? Introducing Textbook Solutions. 16.48, Projects A and B are mutually exclusive lending projects. Assume inflation to be 4%. investment, C) nominal cash flows should be discounted with real rates, D) the rate of inflation must be positive. a nominal interest rate adjusted for inflation, the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; pure time value of money, interest rates or rates of return that have been adjusted for inflation, interest rates that have not been adjusted for inflation, the relationship between real rates, inflation, and nominal rates; the assertion by Irving Fisher that the nominal interest rises or falls point-for-point with changes in the expected inflation rate, the real rate equals the nominal rate minus inflation, the relationship among interest rates on bonds that have different characteristics but the same maturity, a plot of the yields on Treasury notes and bonds relative to maturity; depends on the real rate, expected future inflation, and the interest rate risk premium, the idea that everyone trusts central bankers to do what they say they are going to do, monetary policy or fiscal policy enacted to smooth the business cycle and stabilize growth in real GDP around its long-term trend (potential output) and reduce the output gap, features of the structure of modern government budgets, particularly income taxes and welfare spending, that act to smooth or dampen fluctuations in real GDP, a monetary policy guideline (developed by economist John Taylor) for determining the target for the federal funds rate, when a central bank's monetary policy decisions are judged on how well it maintains a specific and explicit target rate of inflation, variables that are not directly under the central bank's control but lie somewhere between the tools policymakers do control and their objectives; the quantity of money is an example, the FOMC's target for the interest rate at which banks make overnight loans to each other; the FOMC's primary (most important) policy instrument, if the interest rate is less than the inflation rate, then the real rate of interest means that you're (gaining/losing) money, expected high future inflation rates lead to expected (high/low) future interest rates, if the public would rather hold bonds instead of cash or commodities, then it's likely that interest rates are ______ and inflation rates are ______, when a central bank targets the rate of inflation, it will be judged on how well it restricts to growth rate of the money supply in relation the the ________________. Inflation must be added to the nominal rate B. For a limited time, find answers and explanations to over 1.2 million textbook exercises for FREE! If a project permits a reduction in the level of working capital, this reduction is assumed to increase cash flows. 2) The nominal interest rate is A) the interest rate measured in terms of goods. A project is expected to increase by 17000, increase accounts payable by 10000.
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