01 May Question: You have a firm that starts out with $60,000 in cash in the bank. You have three investment oppor…
You have a firm that starts out with $60,000 in cash in the bank. You have three investment opportunities: (1) You can invest $30,000 today and get back a gross payoff of $45,000 next year; (2) you can invest $20,000 today and get back a payoff of $ 24,000 next year; (3) you can invest $10,000 today and get back a payoff of $20,000 next year. You can undertake any or all of these investment opportunities.
- Suppose the interest rate is 30%. What investment policy do you undertake, and what is the value of your firm today after you announce your investment policy?
- Suppose you want to consume $30,000 today and the rest next year. How much money do you need to borrow or lend? How much can you consume tomorrow?
Suppose a fourth investment opportunity (4) is added to the problem: i invest $15,000 today and get back $50,000 next year. In which projects should you invest?v
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