In Figure the sloping line represents the opportunities for investment in the capital market and the solid curved line represents the opportunities for investment in plant and machinery. The company's only asset at present is $2.6 million in cash.

a. What is the interest rate?

b. How much should the company invest in plant and machinery?

c. How much will this investment be worth next year?

d. What is the average rate of return on the investment?

e. What is the marginal rate of return?

f. What is the PV of this investment?

g. What is the NPV of this investment?

h. What is the total PV of the company?

i. How much will the individual consume today?

j. How much will he or she consumetomorrow?

Transcribed Image Text:

Dollars, year 1, millions Owner's preferred consumption pattern 4 3.75 3 Dollars, year 0, millions 1.6 2.6 4