h5s10 - ECO 304K INTRO MICRO SPRING 2010 Hickenbottom...

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ECO 304K INTRO MICRO SPRING 2010 Hickenbottom HOMEWORK #5 (Due April 19) 1. A firm is able to borrow or lend money at a 4% interest rate. The firm is offered the opportunity to invest in a project that costs $4000 today. The project would increase the firm’s profits by $1000 next year, $2000 the year after that, and $1350 the third year, with no benefits beyond that and no residual value to the investment. a) Calculate the net present value of the benefits of the project. Use this to explain whether of not the firm would invest in this project regardless of whether they had $4000 on hand or not. (1 point) b) Explain, only from you answer in (a) what you can tell about the rate of return of this project. (You can’t find the exact ROR, but you can say it is more or less than some number). (1 point) c) Use this reasoning to find the initial cost of the asset that would make the rate of return exactly 10%. (1 point) 2. A market has linear market MC (might be supply) and demand curves. No
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This note was uploaded on 05/04/2010 for the course ECO 304K taught by Professor Hickenbottom during the Spring '10 term at University of Texas at Austin.

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h5s10 - ECO 304K INTRO MICRO SPRING 2010 Hickenbottom...

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