ACCA FM · Chapter 7 · Question 1 of 10
Investors require a real return of 6% a year, and general inflation is expected to be 3% a year. What is the money (nominal) cost of capital, to 2 decimal places?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 9.18%
Explanation
Using the Fisher formula: (1 + money rate) = (1 + real rate) x (1 + inflation rate) = 1.06 x 1.03 = 1.0918. Money rate = 9.18%. Simply adding the two rates (9.00%) is only an approximation.
More Investment appraisal with inflation and taxation MCQs
- Q3When using the real method of investment appraisal, which of the following is correct?
- Q4A project will sell 10,000 units in year 2. The current selling price is $25 per unit, and selling prices are expected to rise by 4% a…
- Q5A company buys a machine for $80,000. Tax-allowable depreciation is available at 25% a year on a reducing balance basis. What is the…
- Q6A machine was bought for $120,000 at the start of year 1 and is sold for $30,000 at the end of year 3. Tax-allowable depreciation is 25%…
- Q7A company buys an asset for $60,000 at the start of year 1 (time 0) and claims tax-allowable depreciation at 25% reducing balance from…