ECO 201 - Suppose a firm is contemplating an investment

Suppose a firm is contemplating an investment with an acquisition cost of $2,100 and an economic life of 11 years. Further suppose the stream of Expected Net Revenue on that investment is provided in the table above.

Please answer the next three questions based on the info provided above.

1. Please select the correct statement from those provided below:

a. Without information on the interest rate, it is impossible to determine whether or not the investment should be adopted.

b. Without information on the PDV of the ENR stream for this investment, it is impossible to determine whether or not the investment should be adopted.

c. Both (a) & (b) are correct.

d. This investment is not profitable and should not be undertaken.

e. This investment may or may not be profitable, depending on the interest rate.

2. Suppose the ENR were 275 and 300 for years 10 and 11, respectively. Please select the correct statement from those provided below:

a. Without information on the interest rate, it is impossible to determine whether or not the investment should be adopted.

b. Without information on the PDV of the ENR stream for this investment, it is impossible to determine whether or not the investment should be adopted.

c. Both (a) & (b) are correct.

d. This investment is not profitable and should not be undertaken.

3. Suppose the ENR were 200 for year 10 and r = 0. Please select the correct statement from those provided below:

a. This investment is profitable and should be undertaken.

b. Absent information on the PDV for this investment, it is impossible to determine whether or not the investment should be adopted.

c. The PDV of the ENR stream for this investment is less than $2,100.

d. This investment is not profitable and should not be undertaken.