ECON 103 Lecture Notes - Lecture 17: Economic Surplus, Starving Artist, Industrial Revolution

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mauvezebra141

4 Apr 2017

School

Simon Fraser University

Department

Economics

Course

ECON 103

Professor

Ryan Allen

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Document Summary

Application 1: rule of 72 72 / r*. 72 is divided by the interest rate in order to figure out the approximate amount of time it will take for an investment to double in worth. This rule is accurate in most contexts, an example of an outlying condition would be the industrial revolution. There were smaller growth rates than normal occurring during that time and the rule of 72 would not have been a relevant equation to apply to investments. Application 2: supposed you have won 1 million dollars, but you get it in installments of ,000 over the years. If the interest rate is positive then we get everything is worth less than 1 million. When the interest rate is 10%, ,000 is valued at ,500. Application 3: dad forgot to give you your allowance of , 40 years ago.

Related Questions

The government is considering paving a highway with a newly developed "wear-proof" material. Paving the highway the traditional way would cost $1 billion today, but the annual projected maintenance is $400 million in each of the next 10 years. Paving the highway using the newly developed wear-proof material would cost $4 billion today, but using the new wear-proof material means there are no maintenance costs for the next 10 years. Only consider the current cost and maintenance costs for the next 10 years when evaluating this project.

(a) Use the concept of present value to determine which method is best if the government can borrow at an interest rate of 4%.

(b) Is it worth it if the interest rate is 0%?

(d) A politician says to you, " don't care what the interest rate is. The new wear-proof material is clearly a good investment: it more than pays for itself in only 8 years, and all the rest is money in the bank." What's wrong with this argument, and why does the interest rate matter?

magentawalrus398

Suppose you win a small lottery and have the choice of two ways to be paid: You can accept the money in a lump sum or in a series of payments over time. If you pick the lump sum, you get $2,800 today. If you pick payments over time, you get three payments: $1,000 today, $1,000 1 year from today, and $1,000 2 years from today.

At an interest rate of 6% per year, the winner would be better off accepting the 1)________ (LUMP SUM or PAYMENTS OVERTIME), since it has the greater present value.

At an interest rate of 9% per year, the winner would be better off accepting 2) ________ (LUMP SUM or PAYMENTS OVERTIME), since it has the greater present value.

3) Years after you win the lottery, a friend in another country calls to ask your advice. By wild coincidence, she has just won another lottery with the same payout schemes. She must make a quick decision about whether to collect her money under the lump sum or the payments over time. What is the best advice to give your friend?

A) The lump sum is always better.

B) The payments over time are always better.

C) It will depend on the interest rate; advise her to get a calculator.

D) None of these answers is good advice.

aquamarinepug18

1. The first cost of a bridge that is expected to have an infinite life is $10 million. The maintenance cost of the bridge will be $150,000 per year. At an interest rate of 10% per year, the annual worth of the bridge is equal to:

a. $3,200,000

b. $1,000,000

c. $1,150,000

d. $850,000

2. When calculating the i* value, all the net positive cash flow are assumed to be reinvested at:

a. The current market interest rate

b. The i* rate

c. The company's MARR

d. The company's cost of capital

3. If you have the present worth of an alternative with a 5-year life, you can obtain its annual worth by:

a. Multiplying the PW by i

b. Multiplying the PW by (A/F, i, 5)

c. Multiplying the PW by (P/A, i, 5)

d. Multiplying the PW by (A/P, i, 5)

4. If you have the capitalized cost of an alternative that has an infinite life, you can get its annual cost over a very long number of years by:

a. Multiplying the capitalized cost by i

b. Multiplying the capitalized cost by (A/F,i, n)

c. Dividing the capitalized cost by (P/A, i,n)

d. Dividing the capitalized cost by i

5. An investment of $85,000 resulted in uniforms income of $15,000 per year for 15 years. The rate of return of the investment is equal to:

a. 10.6%

b. 15.6%

c. 13.7%

d. 23.5%

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ECON 103 Lecture Notes - Lecture 17: Economic Surplus, Starving Artist, Industrial Revolution

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