Macroeconomics
13th Edition
ISBN: 9780134735696
Author: PARKIN, Michael
Publisher: Pearson,
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Question
Chapter 24, Problem 7SPA
To determine
Identify the role of expected profit on
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1. Sarah used to work as a business manager in a small company
for $50,000 per year but quit to start her own fashion business
factory. To invest in her factory, she withdrew $25,000 from
her savings, which paid 4 percent interest, and borrowed
$30,000 from her brother, whom she pays 4 percent interest
per year. Last year she paid $27,000 for ingredients and had
revenue of $70,000. She is asking you to calculate both
accounting and economic profits for her. Show all your
calculations and explanations.
6. A) If a company will pay $100,000 for a truck that will increase deliveries to be made, giving an additional $15,000 in revenue each year for 10 years, should the company buy it? Interest rates are 5%. Show your math.
B) Now revenue is estimated to be only $12,000 a year for 10 years. Same interest rate, should the truck be purchased?
C) Explain where interest rates come from, using details.
Consider that you were given a US savings bond that will pay $100 when it matures in ten years. What happens if the interest rate rises to the present value of this bond payment?Why happens if the interest rate rises to the present value of this bond payment?
A. Increases in present value B. The current value is unaffected. C. A decrease in present value
Chapter 24 Solutions
Macroeconomics
Ch. 24.1 - Prob. 1RQCh. 24.1 - Prob. 2RQCh. 24.1 - Prob. 3RQCh. 24.1 - Prob. 4RQCh. 24.2 - Prob. 1RQCh. 24.2 - Prob. 2RQCh. 24.2 - Prob. 3RQCh. 24.2 - Prob. 4RQCh. 24.2 - Prob. 5RQCh. 24.3 - Prob. 1RQ
Ch. 24.3 - Prob. 2RQCh. 24.3 - Prob. 3RQCh. 24.3 - Prob. 4RQCh. 24.3 - Prob. 5RQCh. 24.3 - Prob. 6RQCh. 24.4 - Prob. 1RQCh. 24.4 - Prob. 2RQCh. 24.4 - Prob. 3RQCh. 24 - Prob. 1SPACh. 24 - Prob. 2SPACh. 24 - Prob. 3SPACh. 24 - Prob. 4SPACh. 24 - Prob. 5SPACh. 24 - Prob. 6SPACh. 24 - Prob. 7SPACh. 24 - Prob. 8SPACh. 24 - Prob. 9SPACh. 24 - Prob. 10SPACh. 24 - Prob. 11SPACh. 24 - Prob. 12SPACh. 24 - Prob. 13APACh. 24 - Prob. 14APACh. 24 - Prob. 15APACh. 24 - Prob. 16APACh. 24 - Prob. 17APACh. 24 - Prob. 18APACh. 24 - Prob. 19APACh. 24 - Prob. 20APACh. 24 - Prob. 21APACh. 24 - Prob. 22APACh. 24 - Prob. 23APACh. 24 - Prob. 24APACh. 24 - Prob. 25APACh. 24 - Prob. 26APACh. 24 - Prob. 27APACh. 24 - Prob. 28APACh. 24 - Prob. 29APACh. 24 - Prob. 30APA
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- Imagine that a local water company issued 10,000 ten-year bond at an interest rate of 6. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now 9. Given the change in interest rates, would you expect to pay more or less than 10,000 for the bond? Calculate what you would actually be willing to pay for this bond.arrow_forwardYou and your friend have opened an account on E-Trade and have each decided to select five similar companies in which to invest. You are diligent in monitoring your selections, tracking prices, current events, and actions the company has taken. Your friend chooses his companies randomly, pays no attention to the financial news, and spends his leisure time focused on everything besides his investments. Explain what might be the performance for each of your portfolios at the end of the year.arrow_forwardYou open a 5-year CD for 1,000 that pays 2 interest, compounded annually. What is the value of that CD at the end of the five years?arrow_forward
- Why can firms not just use their own profits for financial capital, with no need for outside investors?arrow_forward12. Vanessa is working for a marketing firm making $60,000 per year but considers starting her own marketing company. Vanessa has determined that to launch the business, she needs to invest $100,000 of her own funds. She currently makes 6% return on her money while it is in the bank, so if she invests in this business, she will be giving up $6000 ($100,000x.06) in interest each year. The annual cost of running the business will include $70,000 for the rent of the office space, $210,000 for employee wages, and $5,000 for materials and utilities. Vanessa plans to manage the business, which means that she will have to quit her current job. a. Which costs above are considered explicit costs? Which costs are considered implicit costs? b. What is Vanessa's explicit cost per year? C. What is Vanessa's implicit cost per year?arrow_forwardmany people think that the interest rate on a bond tells them all they need to know about how well off they are as a result of owning it. Explain the statement.arrow_forward
- 2. A friend has started a business selling software. The software is a great hit, and the firm quickly grows large enough to sell stock. Your friend's firm promises to pay a dividend of $5 per share every year for the next 50 years, at which point your friend intends to shut down the business. The firm's stock is currently selling for $75 per share. If you believe that the company really will pay dividends as stated and if you require a 10% rate of return to make this investment, should you buy the stock? Briefly explain.arrow_forwardSuppose you buy a house for $250,000. One year later, the market price for the house has fallen to $200,000. What is the return on your investment in the house if you made a down payment of 10 percent and took out a mortgage loan for the other 90 percent? Use the editor to format your answerarrow_forward2. Sam quits his job as an airline pilot and opens his own pilot training school. He was earning $40,000 as a pilot. He withdraws $10,000 from his savings where he was earning 5 percent interest and uses the money in his new business. He uses a building he owns as a hangar that he could have rented out for $5,000 per year. He rents a computer for $1,000, buys office supplies for $500, rents an airplane for $6,000, pays $1,000 for fuel and maintenance, and hires one worker for $30,000. Sam's total revenue from pilot training classes equaled $90,000. Calculate Sam's Economic profit.arrow_forward
- 6) What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?arrow_forward1. The following table presents some data from I.M. Farmer's income statement. Use the information to compute values for each of the items listed below. + Total revenue Net farm income Average net worth Average asset value Interest expense a. Rate of Rate of return on assets b. Rate of return on equity_ C. Return to family labor_ $120,000 Total operating expenses $36,000 Opportunity cost of labor $180,000 opportunity cost of management $360,000 Opportunity cost of capital $12,000 d. Return to management_ % % e. Assess the profitability of I.M. Farmer's business, and explain your answer. $72,000 $20,000 $5,000 12%arrow_forwardPlease explain why this is a good investment?arrow_forward
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