3330_PS2 - Cornell University Gregory Besharov Economics...

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Cornell University Gregory Besharov Economics 3330: Problem Set 2 Due September 15, 2008 1. True/False/Explain State whether each of the following is true or false and explain your answer. Please limit your explanations to no more than two sentences. a. Thinking of an annuity as the difference in two perpetuities, whether the annuity becomes more or less valuable with an increase in the interest rate is indeterminate because both the perpetuity added in and the one that is subtracted out both become smaller in magnitude (i.e., closer to zero). b. A project has positive net present value if and only if its internal rate of return is greater than the company’s discount rate. c. According to Hyman Minsky’s “Financial Instability Hypothesis” article, “speculative finance” units have insufficient cash flow to repay their interest or principal obligations so must sell assets or increase their borrowing. (Article is available in Course Documents section of Blackboard site.) 2. Powerball The winner of the Powerball can choose whether to receive an annuity or a lump-sum payment. Recently, the Powerball was advertised as having a jackpot of $102m with a cash value of $52.1m.
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3330_PS2 - Cornell University Gregory Besharov Economics...

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