Answer to Question #65141 in Macroeconomics for KiefG
a. Use the concept of present value to determine whether the project is worth undertaking if the government can borrow at an interest rate of 4%. Is it worth it if the interest rate is 0%? 8%?
b. A politician says to you, “I don’t care what the interest rate is. The project is clearly a good investment: it more than pays for itself in only 8 years, and the all the rest is money in the bank.” What is wrong with this argument, and why does the interest rate matter?
b) Politician isn`t right, because the project pays for itself in only 8 years if interest rate will be 2,85%=(4 billion/( 400million*8))^1/8, but if the interest rate will less than 2,85% or may be o%, then the project doesn`t pay for itself.
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