Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.80%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.
A. 8.38%
B. 9.79%
C. 8.80%
D. 8.30%
E. 9.38%
Answer: D
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Zinc Corp is planning to purchase new machinery. The initial cash outlay is expected to be $40,000 and the required return on investment is 9%. The cash flows for the next 3 years are $9,800, $11,720 and $9,640. Based on net present value (NPV) analysis, Zinc Corp should:
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