Question : Use the information below to answer the following question(s). Barry operates : 1186195

Use the information below to answer the following question(s).

Barry operates a shop in a resort in an area known for its high inflation rate. The inflation rate for the last few years has been averaging 3 percent a month. His long-term real rate of return is 12 percent, or 1 percent a month. On April 1 he anticipates that real dollar sales during the summer will be as follows:

June$40,000

July $50,000

August$36,000

11) What is the nominal rate of return on a monthly basis for Barry’s shop during the summer?

A) 0.0400

B) 0.0403

C) 0.0430

D) 0.0150

E) 0.0100

12) What will Barry’s sales figures be for each month, respectively, assuming the owner uses the real rate approach?

A) $40,000; $50,000; and $36,000

B) $40,000; $51,500; and $38,192

C) $41,200; $53,044 rounded; and $39,338

D) $41,200; $51,500; and $39,338

E) $40,000; $51,500; and $39,338

13) What will the sales figures be for each month, respectively, assuming the owner uses a nominal rate approach?

A) $40,000; $50,000; and $36,000

B) $40,000; $51,500; and $38,192

C) $41,200; $53,045; and $39,338

D) $41,200; $51,500; and $39,338

E) $40,000; $51,500; and $39,338

14) Assume that in recent years a global economic crisis has produced a very high annual inflation rate of 25 percent. Kenyan Coffee has decided to use a nominal rate to determine capital budgeting decisions. Its traditional real rate of return is 10 percent. What is the company’s nominal traditional rate of return?

A) 0.100

B) 0.250

C) 0.300

D) 0.350

E) 0.375

Use the information below to answer the following question(s).

The owner of Leather Shoe cannot decide how to project the real costs of opening a new shoe store in a community shopping centre. She knows the capital investment that will be made but is not sure of the returns of a store in a new mall. Historically, the retail shoe business has had an inflation rate equal to the economic norm. Both the selling prices and operating costs increase to some degree. The owner desires a real rate of return of 10 percent. It is anticipated that inflation will be 3 percent during the next few years. The company expects a new store to show a growth rate, without inflation, of 8 percent. Annual sales are expected to be $800,000.

15) What is the nominal rate of return that the store must earn to achieve the owner’s objective?

A) 0.160

B) 0.133

C) 0.130

D) 0.103

E) 0.110

16) What will be the sales figures for years one and two, respectively, assuming the owner uses the nominal rate approach and there is no growth in sales?

A) $880,000 and $968,000

B) $904,000 and $1,021,520

C) $824,000 and $848,720

D) $906,400 and $1,026,951

E) $906,400 and $1,113,920

17) When cash flows are stated in real dollars and discounted using the a nominal rate,

A) this understates the Present Value of the future cash flows.

B) this overstates the Present Value of the future cash flows.

C) this neither understates nor overstates the Present Value of the future cash flows.

D) this increases the payback period and increases the RRR.

E) this is a normal adjustment made to account for risky projects.

18) The most frequently encountered error when accounting for inflation in capital budgeting is

A) determining the amount of net cash flows after taxes.

B) determining the nominal discount rate.

C) keeping net cash flows in real terms and using a nominal discount rate.

D) keeping net cash flows in nominal terms and using a real discount rate.

E) increasing the nominal rate by the inflation rate.

19) A company’s General Ledger recorded sales of $545,000 last year, when the inflation rate adjusted for the year, was 4.0%. If the company’s required rate of return was 10%, what are the real cash flows, and the nominal cash flows, respectively?

A) $478,070 and $514,151

B) $478,070 and $545,000

C) $495,455 and $545,000

D) $514,151 and $495,455

E) $524,038 and $545,000