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Chapter 8 Quiz
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CHAPTER 8 - Capital Budgeting and Investment Decisions
/ Chapter 8 Quiz
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Suppose that two years ago a company invested in Project A and its main competitor invested in Project B. Both Project A and Project B had
the same initial cash outlay and applied the same annual interest rate. Project A earned simple interest and Project B earned compound
interest. If interest is applied annually, which of the following statements is true?
Select one:
a. Project A is a more attractive investment than Project B.
b. Project A has earned more interest to date than Project B.
c. Project A has earned the same amount of interest to date as Project B.
d. Project A has earned less interest to date than Project B.
Your answer is incorrect.
Explanation: When simple interest is used, interest is only applied to the principal. However, under compound interest, interest is applied to
the principal balance as well as the interest earned to date. Therefore, more interest will be earned using compound interest.
The correct answer is: Project A has earned less interest to date than Project B.
12/9/23, 6:05 AM
Chapter 8 Quiz
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