Question

QUESTION ONE

1. An investment project requires an initial outlay of £7,500 and will pay back £2,000 at the end of the next 5 years. Is it worthwhile if capital can be invested elsewhere at 12%? [3 Marks].
2. Given that the marginal propensity to consume (MPC) for a certain village is 0.8 and consumption is 40 when income is zero, find the consumption function and savings functions [4 Marks].
3. A manufacturer determines that D( p) = 5,000e^-0.02p units of a particular commodity will be demanded (sold) when the price is p dollars per unit. Determine the price at which total revenue will be maximized[4 MARKS]
4. A 2-hour movie runs continuously at a local theater. You leave for the theater without first checking the show times. Use an appropriate uniform density function to find the probability that you will arrive at the theater within 10 minutes of (before or after) the start of the film [4 MARKS].

Answer 1

first of all

pv of £2000 in 1st year = £ 1785.71 ( £2000/1.12)

pv of £2000 in 2nd year = £ 1594.39( £2000/1.12)2

pv of £2000 in 3rd year = £ 1423.56  ( £2000/1.12)3

pv of £2000 in 4thyear = £ 1271.04  ( £2000/1.12)4

pv of £2000 in 5th  year = £ 1134.85  ( £2000/1.12)5

total pv for future returns are =£ 7209.55

less initial out lay so = less £7500

= -£290.45(7209.55-7500)

the npv is less than zero so this not a worth while investment