a. Notice that the present value of the MRP declines as more
capital is used. What economic principle accounts for
this?
b. If a unit of capital can be purchased for $5000, how many
will the firm purchase? Explain.
c. Suppose the market interest rate falls. Explain what
happens to the PV of the stream of future MRPs. What
happens to the firm’s profit-maximizing level of capital?
5. Wintertown Snow Removal Co. purchases snowplows for its
residential snow clearing business. The purchase price of an
additional snowplow is currently $50 000 and it is expected to
produce a stream of MRPs for 12 years. The interest rate is 4
percent and the present value of the stream of MRPs is $50 000.
a. With this information, should the company purchase the
additional snowplow?
b. Suppose instead the interest rate were 6 percent. How
will this affect the future stream of MRPs and the
purchase decision?
c. Suppose instead the interest rate were 2 percent. How
will this affect the future stream of MRPs and the
purchase decision?
d. Suppose again that the interest rate is 4 percent. The
company now learns of a new technology that is expected
to reduce the price of home snowblowers by 50 percent.
How will this affect the future stream of MRPs and the
purchase decision?
e. Suppose the interest rate is 4 percent and that new
rishikesh
(rishikesh)
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