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Question 1 : Interest Rates 2 0 marks 1 . 1 . Discuss the meaning of each of the following statements: a . The present
Question : Interest Rates marks
Discuss the meaning of each of the following statements:
aThe present value of the future cash flows expected from an investment project is
R
bThe net present value NPV of an investment project is R
cA projects cost of capital is percent
Companies may need to make the right operational decisions regarding production
capacity and related infrastructure to maximise the options inherent in projects.
Discuss managerial options embedded in investment projects and give some
examples.
A company may borrow funds to invest in plant and equipment to utilise these in its
business operations and generate a return greater than the cost of borrowing. The
bank will lend funds to the company at rate that is higher than the cost of such funds
to the bank. Although the supply and demand for funds will drive the interest rates, the
South African Reserve Bank can influence these in a shortterm by setting the repo
rate, the rate at which it lends to commercial banks. Discuss the three main variables
that influence the interest rate.
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