Discuss the effects of profitability and current cash flow on investment decisions. Hints: Discuss your answers in the context of the new investment function:

=[(),]

Define the present value of expected future profits, (). What does it represent, profitability

or current cash flow? What are static expectations? Derive the relevant equation for () assuming static

expectations. How does respond to changes in ()? How does respond to changes in the user cost of

capital, + ?

What does the rate of profit, , represent, profitability or current cash flow? What is a function of?

(25 points) 3. Discuss the effects of profitability and current cash flow on investment decisions. Hints: Discuss your answers in the context of the new investment function: 1+ = 1 [V (11%), 114] Define the present value of expected future profits, V (1%). What does it represent, profitability or current cash flow? What are static expectations? Derive the relevant equation for V(II) assuming static expectations. How does It respond to changes in V (II)? How does It respond to changes in the user cost of capital, rt + 8? What does the rate of profit, Ilt, represent, profitability or current cash flow? What is IIt a function of? (25 points) 3. Discuss the effects of profitability and current cash flow on investment decisions. Hints: Discuss your answers in the context of the new investment function: 1+ = 1 [V (11%), 114] Define the present value of expected future profits, V (1%). What does it represent, profitability or current cash flow? What are static expectations? Derive the relevant equation for V(II) assuming static expectations. How does It respond to changes in V (II)? How does It respond to changes in the user cost of capital, rt + 8? What does the rate of profit, Ilt, represent, profitability or current cash flow? What is IIt a function of