The point of this question/table (along with the "Bonus" questions that follow) is to think about the relationship the textbook authors call the "investment line" (and which we'll subsequently call the "demand for investment," "investment demand," or equivalently the "demand for loanable funds"). Suppose that there are 5 possible investment projects that can be undertaken in the macroeconomy: Projects A - E. For simplicity, each project has an up-front cost of $100, and the project lasts for just one year: there is no depreciation (d = 0), and we'll suppose (silly!) that the machine just vaporizes at the end of the year it's installed. So, there are 3 relevant details: the up-front cost ($100); the (real) revenue each project returns one year later, and the real interest rate. The following table summarizes:ProjectCost (today)(real) revenue in 1 year from todayPV of the (real) revenue when the real interest rate is…2%4%6%A$100$101$99.02 B$100$103 $97.17C$100$105 D$100$107 $102.88 E$100$109 Complete the missing cells in the table, which involves figuring out the present value of the one-year-ahead revenue for each project, and for each of the three interest rate (r) options.
Question
The point of this question/table (along with the "Bonus" questions that follow) is to think about the relationship the textbook authors call the "investment line" (and which we'll subsequently call the "demand for investment," "investment demand," or equivalently the "demand for loanable funds"). Suppose that there are 5 possible investment projects that can be undertaken in the macroeconomy: Projects A - E. For simplicity, each project has an up-front cost of 100); the (real) revenue each project returns one year later, and the real interest rate. The following table summarizes:ProjectCost (today)(real) revenue in 1 year from todayPV of the (real) revenue when the real interest rate is…2%4%6%A10110097.17C105 D107 100$109 Complete the missing cells in the table, which involves figuring out the present value of the one-year-ahead revenue for each project, and for each of the three interest rate (r) options.
Solution
To complete the table, we need to calculate the present value (PV) of the future revenue for each project at each interest rate. The formula for calculating the present value is:
PV = Future Value / (1 + r)^n
where r is the interest rate and n is the number of periods (in this case, 1 year).
Let's calculate:
For Project B:
- At 2% interest rate, PV = 100.98
- At 4% interest rate, PV = 99.04
- At 6% interest rate, PV = 97.17
For Project C:
- At 2% interest rate, PV = 102.94
- At 4% interest rate, PV = 100.96
- At 6% interest rate, PV = 99.06
For Project D:
- At 2% interest rate, PV = 104.90
- At 4% interest rate, PV = 102.88
- At 6% interest rate, PV = 100.94
For Project E:
- At 2% interest rate, PV = 106.86
- At 4% interest rate, PV = 104.81
- At 6% interest rate, PV = 102.83
So, the completed table would look like this:
| Project | Cost (today) | (real) revenue in 1 year from today | PV of the (real) revenue when the real interest rate is…2% | 4% | 6% |
|---|---|---|---|---|---|
| A | $100 | $101 | $99.02 | $97.12 | $95.28 |
| B | $100 | $103 | $100.98 | $99.04 | $97.17 |
| C | $100 | $105 | $102.94 | $100.96 | $99.06 |
| D | $100 | $107 | $104.90 | $102.88 | $100.94 |
| E | $100 | $109 | $106.86 | $104.81 | $102.83 |
Similar Questions
Suppose that there are 5 possible investment projects that can be undertaken in the macroeconomy: Projects A - E. For simplicity, each project has an up-front cost of $100, and the project lasts for just one year: there is no depreciation (d = 0), and we'll suppose (silly!) that the machine just vaporizes at the end of the year it's installed. So, there are 3 relevant details: the up-front cost ($100); the (real) revenue each project returns one year later, and the real interest rate. The following table summarizes:ProjectCost (today)(real) revenue in 1 year from todayPV of the (real) revenue when the real interest rate is…2%4%6%A$100$101$99.02 B$100$103 $97.17C$100$105 D$100$107 $102.88 E$100$109 Complete the missing cells in the table, which involves figuring out the present value of the one-year-ahead revenue for each project, and for each of the three interest rate (r) options.
2a) A company is considering investing in a new project that requires an initial investment of $50,000. The project is expected to generate cash inflows of $10,000 per year for the next five years. The salvage value of the project at the end of the fifth year is estimated to be $5,000. The company uses straight-line depreciation for all its capital investments. Calculate the Accounting Rate of Return for this project. 2b) Suppose a company is considering a new project that requires an initial investment of $50,000. The company's cost of capital 8%. What is the NPV of the project?
Straight-line depreciation per annum is defined as: Group of answer choices Initial Cost Initial Cost / Useful Life Initial Cost - Useful Life Initial Cost + Useful Life Useful Life
Net investment is ______.Multiple choice question.the total amount of new investment purchasesthe wear and tear on investmentgross investment minus depreciationthe total amount of investment purchases, whether new or previously existing
A. If the interest rate is 2%, then project(s) is (are) profitable, and the quantity of investment demanded (or, undertaken) is $ .B. If the interest rate is 4%, then project(s) is (are) profitable, and the quantity of investment demanded (or, undertaken) is $ .C. If the interest rate is 6%, then project(s) is (are) profitable, and the quantity of investment demanded (or, undertaken) is $ .D. When the interest rate is %, the quantity of investment demanded is $500.E. When the interest rate is %, the quantity of investment demanded is zero ($0).
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