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.