Question

Which one of the following statements about inflation is correct?

• A.

  The real rate of return accurately indicates how an investment opportunity will change the investor's purchasing power.

• B.

  The greater the inflation rate is, the stronger the purchasing power of a currency becomes.

• C.

  Deflation is highly desired because it immediately stimulates consumption in an economy.

• D.

  When the expected inflation increases, the nominal interest rates decline.

Which of the following statements about capital budgeting tools are correct?

I. In comparing two projects, one should use the net present value (NPV) over the internal rate of return (IRR) because NPV properly takes into account the differences in project scale.

II. It is crucial to know what the proper discount rate is in estimating the net present value (NPV) for a project.

III. In comparing two projects, one should use the internal rate of return (IRR) over the net present value (NPV) because IRR properly takes into account the differences in project scale.

IV. It is crucial to know what the proper discount rate is in estimating the internal rate of return (IRR) for a project.

V. Analytical results from the payback period rule always agree with the results from the net present value (NPV) but disagree with the results from the internal rate of return (IRR).

VI. The payback period rule is the most widely used decision tool because it properly accounts for the time value of money and long-term risk.

Answer 1

1. The real rate of return will be accurately indicating how the investment opportunity will change the purchasing power of the investor because it will account after deducting the inflation rate from the nominal rate

All the other statements in relation to inflation rate and deflation and expected inflation are false.

Correct answer will be option ( A)

2. it will be crucial to know the proper discount rate in estimation of the net present value of the product in order to make the better acceptability decision and not accept the bad project which can destroy the value of company.

Correct answer will be option (II).