2D1F THE OWNER OF WOOFIE’S VIDEO RENTAL CANNOT DECIDE HOW TO PROJECT...

303.

CSO: 2D1b

LOS: 2D1f

The owner of Woofie’s Video Rental cannot decide how to project the real costs of

opening a rental store in a new shopping mall. The owner knows the capital investment

required but is not sure of the returns from a store in a new mall. Historically, the video

rental industry has had an inflation rate equal to the economic norm. The owner requires

a real internal rate of return of 10%. Inflation is expected to be 3% during the next few

years. The industry expects a new store to show a growth rate, without inflation, of 8%.

First year revenues at the new store are expected to be $400,000.

The revenues for the second year, using both the real rate approach and the nominal rate

approach, respectively, would be

a.

$432,000 real and $444,960 nominal.

b.

$432,000 real and $452,000 nominal.

c.

$440,000 real and $452,000 nominal.

d.

$440,000 real and $453,200 nominal.