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Consider the situation where you have an opportunity to invest into a project in current period t = 1. If you invest, you pay the
Consider the situation where you have an opportunity to invest into a project in current period t = 1. If you invest, you pay the initial cost of c> 0 in period t = 1 with no cost in the future periods, and you obtain the constant payoff a > 0 in every period. Let 8 (0,1) denote the discount factor. Then, the present value of your payoffs from the project is given by: 7 +81 +827 +887 +... =a 84-1 t=1 (1) Find the critical payoff 7* such that the project should be implemented if > 7* and the project should not implemented if a
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