The XYZ Corporation determines it can make a real (inflation-adjusted)return on an investment of 9 percent. The nominal rate of interest is 13 percent and the rate of inflation is 7 percent. We can conclude that the
A)investment will be profitable.
B)investment will be unprofitable.
C)real rate of interest is 4 percent.
D)real rate of interest is 2 percent.

Question

Quizplus · Accepted Answer

The real rate of interest is the nominal rate of interest minus the rate of inflation. In this case, the real rate of interest is 13% - 7% = 6%. Since the real rate of interest is greater than the company's required rate of return of 9%, the investment will be profitable.

The XYZ Corporation Determines It Can Make a Real (Inflation-Adjusted)return