Study Guide for Microeconomics
9th Edition
ISBN: 9780134741123
Author: Robert Pindyck, Daniel Rubinfeld
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 15, Problem 10E
To determine
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Limitless Ltd. is planning to buy a new warehouse to store its production output. The investment would require £500,000 to be paid upfront. Thanks to the new warehouse, the company expects to increase its profits by £120,000 annually for the next five years, and then £60,000 for the following five years.
Calculate the Net Present Value (NPV) of this investment opportunity if the cost of capital is 12%.
Should Limitless Ltd. go ahead with the purchase of the new warehouse? Explain your reasoning.
What is the payback period of this investment?
Suppose the Internal Rate of Return (IRR) of this investment opportunity is 15%. Based on this information alone, should Limitless Ltd. make the investment? Why? Would this decision be consistent with that from B? Explain your reasoning.
Suppose that, instead of paying the initial £500,000 now, Limitless Ltd. decides to pay it in equal instalments over the next 10 years. How much would the company need to pay each year to make all…
HighFlyer Airlines wants to build new airplanes with greatly increased cabin space. This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher price. However, redesigning the cabin means rethinking many other elements of the airplane as well, like engine and luggage placement, and the most efficient shape of the plane for moving through the air, which requires investment spending. The table below shows the level of R&D spending necessary to achieve different rates of return (due to higher ticket revenue).
Private Rate of Return
Level of R&D Spending
12%
$100
10%
$200
8%
$300
6%
$400
4%
$500
If the opportunity cost of financial capital for HighFlyer Airlines is 6%, how much should the firm invest in R&D?
Assume that the social rate of return for R&D is an additional 2% on top of the private return; that is, an R&D investment that had a 7% private return to HighFlyer Airlines would…
Indicate whether the statement is true or false, and justify your answer.
1. The internal rate of return is defined as the interest rate that makes the net present value of an investment stream exactly equal to zero.
2. In part, physicians’ salaries are higher than secretaries’ salaries because it takes more years to train to become a physician than it does to become a secretary.
3. The fact that practicing surgeons who have finished residency earn more than practicing pediatricians implies that the rate of return to choosing surgery exceeds the rate of return to choosing pediatrics for a medical school graduate.
Chapter 15 Solutions
Study Guide for Microeconomics
Knowledge Booster
Similar questions
- Determine which of the two investment projects of Problem 5 the manager should choose if the discount rate of the firm is 30 percent. Additional information. Problem 5 states determine which of two investment projects a manager should choose if the discount rate of the firm is 10 percent. The first project promises a profit of $100,000 in each of the next four years, while the second project promises a profit of $75,000 in each of the next six years.arrow_forwardSuppose you are considering whether to purchase a house off of Lake Erie for $400,000. You expect the total costs of maintaining the property (utilities, repairs, etc.) to equal $15,000/year, and that you would be able to generate $35,000/year in revenue if you were to put the house on the short term rental market. Suppose you are deciding between purchasing the home or whether to invest $400,000 in an interest-bearing account. If your objective is to maximize your own net income, what would the interest rate have to equal for you to invest in the interest-bearing account? Can you help me just figure out how to set this up? I get that we need the investment to equal 20k but not sure on how to figure out interest rates.arrow_forwardSuppose you are considering whether to purchase a house off of Lake Erie for $400,000. You expect the total costs of maintaining the property (utilities, repairs, etc.) to equal $15,000/year, and that you would be able to generate $35,000/year in revenue if you were to put the house on the short term rental market. Suppose you are deciding between purchasing the home or whether to invest $400,000 in an interest-bearing account. If your objective is to maximize your own net income, what would the interest rate have to equal for you to invest in the interest-bearing account? Suppose you decide to buy the house, and now you have to decide whether/when to list the house on the short term rental market (like Airbnb) or stay in the house yourself. Briefly explain what this decision would depend on. What are the implicit (opportunity) costs associated with renting the house to someone else on a given day? What are the implicit costs associated with the staying in the house yourself?…arrow_forward
- Suppose you buy a house for $250,000. One year later, the market price for the house has fallen to $200,000. What is the return on your investment in the house if you made a down payment of 10 percent and took out a mortgage loan for the other 90 percent?arrow_forwardMary’s Apples grows organic apples and sells them to national grocery chains, local grocers, and markets. Mary purchased a machine for $450,000 that sorts the apples by size. The largest apples are sold as loose apples to the various stores, the medium-sized apples are bagged and sold to the grocers in their bagged state, and the smallest apples are sold to deep discounters or to a local manufacturing plant that processes the apples into applesauce. Mary is considering keeping the small apples and processing them into apple juice that would be sold under Mary’s own label to local grocers. The small apples currently sell to the deep discounters and local manufacturers for $1.10 per dozen. The variable cost to prepare the small apples for sale, including transporting the apples, is $0.30 per dozen. Mary can sell each gallon of organic apple juice for $3.50 per gallon. It takes two dozen small apples to make one gallon of apple juice. The cost to produce the organic apple juice will be…arrow_forwardConsider the following hypothetical investment for the fund. Issue a one-month liability and purchase a $1,000, 15-year, 5% coupon Treasury bond. Assume that the one-month interest rate is currently 2% and that the 15-year interest rate is currently 5%. How much in liabilities would the fund have to issue to finance the purchase of the Treasury bond? At the end of one year the fund has received the coupon-interest payment on the bond and paid interest on its short-term liabilities. What is the net earnings for the fund for that year? What is the value of the bond investment at the end of the year (there are 14 years to maturity remaining on the bond) assuming that the long-term rate is still 5%? What is the net asset value (market value of assets minus liabilities) of the fund?arrow_forward
- A business contemplates building a new manufacturing facility and will need to seek loanable funds of $130 million. It expects that the new facility will yield a 12% return on investment (ROI). Given the current loanable funds market equilibrium depicted in the graph below, is it likely that the firm will borrow the money to build the new facility? Why?arrow_forwardsuppose that Charlie faces the same choice, but he always integrates the gains or losses of both days regardless of how he chooses to check his investment. Also, assume now that if he decides to check at the end of each day, he has an additional option of pulling all his money out of the stock market at the end of the first day if he wishes. Would Charlie pull his money out at the end of the first day, if he finds that his investment has gone up by $3000? Explain. Would Charlie pull his money out at the end of the first day, if he finds that his investment has gone down by $1000? Explain. Given the investment decisions in Questions (2) and (3), which will he prefer, to check at the end of each day or to check only at the end of the second day?arrow_forwardIf the initial cost of an investment project is not totally sunk (the project is not totally irreversible), one should not consider real options” True or False? Write a short answer that offers a discussion about the statement. (10%)arrow_forward
- ) A college is considering investing $6 million to add 10,000 seats to its football stadium. The athletic department forecasts it can sell all these extra seats at each game for a ticket price of $20 per seat, and the team plays six home games per year. If the school can borrow at an interest rate of 14%, should the school undertake this project? (Show your math!) What would happen if the school expected a losing season and could sell tickets for only 5,000 of the seats?arrow_forwardImagine you are the owner of a downtown Laredo building that you lease out for a yearly amount of $ 45,000 over a span of five years. Assume that the explicit expenses for maintaining the building are $ 20,000, and an additional implicit cost of $15,000 exists. All earnings and costs occur at the conclusion of each year. Suppose the interest rate is 7.5 percent, Determine the present value for both the stream of: (i) your accounting profits. Show your steps. (ii) economic profits. Show your stepsarrow_forwardA university student was bequeathed $2,000 upon graduation at age 20 years. This person was hired by one of the largest global tech companies soon after graduation with an expected annual income of $250. Assume that the retirement age is 65 years and life expectancy is 85 years in the country in which the student resides. Given that this country has zero real interest rate and consumption smoothing is optimal for all individuals: Derive an expression for the person’s lifetime resources clearly describing each term. Calculate the value of the person’s lifetime resources. Derive an expression for the person’s consumption function clearly describing any new terms included. Derive an expression for the person’s average propensity to consuming. State the theory on which you based the calculations in parts i., ii. and iii. above.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Economics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Microeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506893Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Managerial Economics: Applications, Strategies an...EconomicsISBN:9781305506381Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. HarrisPublisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Microeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506893
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Managerial Economics: Applications, Strategies an...
Economics
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:Cengage Learning