Suppose an investment project costs $100,000 to start in period 0, and we know of the dividends it will return with certainty. The project returns dividends of $0 in period 0, $20,000 in period 1, $30,000 in period 2, $40,000 in period 3, $ 30,000 in period 4, and shuts down in period 5.

1) Calculate the net present value of the investment project if the real interest rate is 5%.
 DETERMINE the investment project be a good idea? Why?

2) Calculate the net present value of the investment project if the real interest rate is 10%.
Will the investment project be a good idea? Why?
Suppose we want to know the change in real interest rates on our aggregate level of investment.

3) Plot the investment demand schedule when there is an increase in real interest rates.
After the increase in real interest rates, show aggregate investments increase or decrease?
Using net present value of investment projects, show why  they increase or decrease?

4)  Plot the investment demand schedule when there is a decrease in real interest rates.
After the decrease in real interest rates, how to determine  aggregate investments increase or decrease? Using net present value of investment projects, how to show if they increase or decrease?

Answer rating: 100% (QA)

Lets start by calculating the net present value NPV of the investment project at different real inte... View the full answer