The XYZ Corporation determines it can make a real (inflation-adjusted) return on an investment of 9 percent. The nominal rate of interest is 13 percent and the rate of inflation is 7 percent. We can conclude that the
A) investment will be profitable.
B) investment will be unprofitable.
C) real rate of interest is 4 percent.
D) real rate of interest is 2 percent.

Question

Quizplus · Accepted Answer

We can determine the real rate of interest by subtracting the rate of inflation from the nominal rate of interest, which is 6 percent (13% - 7%). Since the real return expected by the XYZ Corporation is 9 percent, and the real rate of interest is 6 percent, the investment will be profitable. Therefore, answer choice A is correct. Neither answer choice C nor D are correct, as they do not accurately reflect the situation presented in the question.

The XYZ Corporation Determines It Can Make a Real (Inflation-Adjusted)