Assignment

Assignment - vestment 4 1 a Total benefits are maximized...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
ECON 560 Spring, 2011 Managerial Economics Professor Bae Assignment 1 Solution 1. Option 1 (lease): PV = 8 , 000 1 . 06 + 8 , 000 (1 . 06) 2 + 8 , 000 (1 . 06) 3 = $21 , 384 Option 2 (purchase): PV = $20 , 000 So it is better to buy rather than lease. 2. What is the present value of the following series of cash flows at an interest rate of 7%: $1,000 today, $2,000 at the end of year 1, $4,000 at the end of year 3, and $6,000 at the end of year 5? PV = 1 , 000 + 2 , 000 (1 . 07) + 4 , 000 (1 . 07) 3 + 6 , 000 (1 . 07) 5 = $ 10,412 3. The net present value of the investment is NPV = $15 , 000 (1+0 . 20) 1 - $10 , 000 = $12 , 500 - $10 , 000 = $2 , 500. Since the net present value is positive, the investment should be under- taken. Cash flow considerations are irrelevant, in this case. Your firm could secure a $ 10,000 one-year loan from the bank at 20 percent. Since the net present value is positive, in one year the $ 15,000 generated from the investment will be more than enough to pay back the interest and principal on the loan. Thus, cash flow is not really an issue in this case, and in present value terms, your firm will pocket $ 2,500 from this in-
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: vestment. 4. 1 a. Total benefits are maximized when MB ( Q ) = 100-4 Q = 0, which means Q = 25. b. The total costs of recycling are minimized when Q equals zero. c. Setting MNB ( Q ) = 100-4 Q-2 = 0 and solving, we see that the net benefits of recycling are maximized when Q = 24 . 5. d. The optimal level of recycling is 24.5. At this level, the net benefits are maximized. 5. a. 16 units, since 12 - 3(2) - 4(1) + 10 + 2(2) = 16. b. Complements, since the coefficient of P y is a negative number (-4). This means an $ 1 increase in the price of good Y decreases the demand for good X by 4 units. c. Normal, since the coefficient of M is a positive number (1). This means a $ 1 increase in income increases the demand for good X by 1 unit. d. The demand curve is Q d x = 12-3 P x-4(1) + 10 + 2(2) = 22-3 P x . The inverse demand curve is thus P x = 22 3-1 3 Q d x . 2...
View Full Document

This note was uploaded on 02/20/2011 for the course ECON 560 taught by Professor Pe during the Spring '11 term at Maryland.

Page1 / 2

Assignment - vestment 4 1 a Total benefits are maximized...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online