Managerial Economics - Econ 351M Fall 2015 - Homework 2
1. What is the maximum amount you would pay for an asset that generates an income of $250,000 at the end of five years if the opportunity cost of using funds is %8?
2. What is the value of a preferred stock that promises to pay a perpetual dividend of $125 at the end of each year when the interest rate is %5? In which direction would you move the interest rate you use to evaluate this net present value if the company's prospects begin to look riskier? Why?
3. An owner can lease her building for $120,000 per year for three years. The explicit cost of maintaining the building is $40,000, and the implicit cost is $55,000. All revenues are received, and costs borne, at the end of each year. If the interest rate is %5, determine the present value of the stream of accounting profits, and the present value of the stream of economic profits.
4. You are in the market for a new frig and you have narrowed the search to two models. The energy-efficient model sells for $700 and will save you $45 per year. For the purposes of use, the standard model is indistinguishable from the energy efficient model except that it costs $500. Assuming that your opportunity cost of funds is %6, which frig should you purchase?