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posted by  Balloon Boy on 11/3/2009 8:44:33 AM  |  status: Live  |  Earned Karma: 35

Microeconomics Question- Lifesaver

Course Textbook Chapter Problem Needs by
N/A N/A N/A N/A 11/4/2009 at 10:00:00 AM
Question Details:

Can someone help me with part A of this problem.  I will give lifesaver.


Consider the following two projects:


Project A:  Costs $10,000 today.  Increases profit by $4100 next year and $7,000 the year after that

Project B:  Costs $6000 today.  Increases profit in two years by $7,100

A firm faces a rate to borrow money of 8% and has the option of investing money with almost no risk at 6%.


a)  If the firm has $20,000 on hand, with only these two project to choose from, will they invest in A, B, neither or both?  Show the calculations that lead to your conclusions.  Explain whether you answers would be different for either project if the firm had no money on hand to invest.  


b)  Set up (but do not solve) and equation that would find the rate of interest where the firm is indifferent between investing in project B, and not investing in project B.  


c)  Explain, based on your calculations in (a), why the rate of return on project A must be somewhere between 6% and 8%  

Tags: Economics
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