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Problem 2: Net-Present Values [12 Points] Suppose that you are considering an investment, which would require you to pay $1,000 up front (today), and you
Problem 2: Net-Present Values [12 Points] Suppose that you are considering an investment, which would require you to pay $1,000 up front (today), and you would receive a payment of $100 per year, for 5 years, beginning one year from now. One year after your fifth payment, you would then have $800 paid to you as a final payment. Assume that the interest rate is equal to 5%. Round all answers to two decimal places. 5. Calculate the Present Value (PV) of the cost and each of the payments for the investment. Does this investment have a positive or negative present value? Should you make this investment? [5 points) 6. How much would the initial cost ($1,000) need to change for you to be exactly indifferent about this investment? (i.e. you receive the same return for making this investment as you do for not making this investment?) (2 points) Suppose that the government puts out a tax incentive that encourage people to save more money. Assume that this does not lead to a change in Y* or G, but does lead to a decrease in Consumption. 7. What would we expect to happen to interest rates? Explain your answer. [2 points] 8. Would this change in interest rates increase or decrease the present value (PV) of the investment that this question is considering? Explain your answer. [3 points]
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