Author Question: Explain each of the determinants of the present value of expected profits from a buying a new ... (Read 53 times)

kaid0807 · **on:** Jun 30, 2018

Explain each of the determinants of the present value of expected profits from a buying a new machine.

What will be an ideal response?

Question 2

Whenever the expected inflation rate is positive

A) the real interest rate is greater than the nominal interest rate.
B) the real interest rate is negative.
C) the real interest rate is positive.
D) the nominal interest rate must be equal to the real interest rate.
E) none of the above

huda · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

A firm must form expectations of future expected profits (per unit of capital). This implies that they must also form expectations of future output which are correlated with future profit. They must also form expectations of future interest rates to calculate present values. And finally, they must know the current price of the project and the rate of depreciation. Once they do all of this, they calculate the discounted present value of the project and compare that with its price.

Answer to Question 2

E