CAPITAL BUDGETING: DECISION
CRITERIA AND REAL OPTION
ANSWERS TO QUESTIONS:
1. The net present value method computes the present worth of a project's benefits over its
costs, evaluated using the firm's cost of capital. If a project
CHAPTER 10: CAPITAL BUDGETING TECHNIQUE
What is the financial managers goal in selecting investment projects for the
firm? Define the capital budgeting process and explain how it helps managers
achieve their goal.
What is the payback period? How is
Case Study: Policy in the Great Depression
The economy during the Great Depression faced a 25% unemployment
rate, multiple bank failures, and emotional distress.
An unequal distribution of wealth, inflated stock prices, and insolvent banks
led to the Grea
New Classical Macroeconomics
The new classical theory states that a change in the aggregate price level
can influence output.
Robert Lucas proposed that people are generalists in their consumption but
specialists in their production.
The labor supply equa
Monetary Responses to Changes in the Economy
When the aggregate demand (AD) curve shifts inward, the price and
output levels fall in the short run. Expansionary monetary policy will shift
the AD curve back to its original position.
When the short-run aggr
Hot Topic: Should Monetary Policy Be Made by Rule or Discretion?
The timing lag and rent-seeking behavior are problems associated with
discretionary monetary policy.
Monetary rules are hard to specify and implement and do not allow for the
The Quantity Theory of Money (Review)
According to the classical view of money, the nominal economy is unrelated
to the real economy, and money is neutral.
The quantity equation of money is M V = P Y, where M is the money
supply, V is the velocity of mone
New Keynesian and New Classical Approaches to Fiscal Policy
The new classical view of fiscal policy states that prices and wages adjust
automatically to eliminate conditions of excess supply or excess demand.
The new Keynesian view of fiscal policy states
Hot Topic: The Political Business Cycle
The political business cycle is the theory that politicians, acting in their
own self-interests, try to use monetary and fiscal policy to stimulate the
economy before an election and slow it down after an election.
Fiscal Policy Using the AD/AS Model
The government uses automatic stabilizers and discretionary fiscal policy to
influence the economy.
Automatic stabilizers, such as the progressive tax system and unemployment
insurance, are passive fiscal policy influen
Unanticipated Changes in Aggregate Supply
Supply shocks shift the short-run aggregate supply (SRAS) curve
inward and create stagflation.
Policymakers face a trade-off between increasing output or decreasing
Government fiscal policy and the
Equilibrium in the Money Market
In the macroeconomy, savings = investment.
Excess demand for loanable funds causes an upward adjustment of the
Excess supply of loanable funds causes a downward adjustment of the
A change in a
Unanticipated Changes in Aggregate Demand
A change in an autonomous spending component will shift the aggregate
demand (AD) curve. When the AD curve shifts inward, the short-run
equilibrium occurs at a lower price and output level, leading the econo
How the Fed Changes the Money Supply
The three tools of monetary policy that the Federal Reserve uses to
control the money supply are: the required reserve ratio, the discount
rate, and open market operations.
The money multiplier effect can be reduced wh