Assume that capital markets do not exist. Ryan has $89,000 today (t = 0) and will receive $109,000 in exactly one year (t = 1). The graph below illustrates point Y: having $89,000 now and receiving $109,000 next year. Here, if no capital or financial market exists, then Ryan must consume $89,000 now and $109,000 next year. Next consider this case when borrowing and lending at r = 10% are available in the financial markets; Ryan now has a real investment opportunity, or business project. If Ryan decides to accept this opportunity, it will cost $29,500 now (t = 0) and will offer a risk-free payoff of $44,000 next year. Now, revisit the point Y where Ryan has $89,000 now and will receive $109,000 next year, but this time the real asset project exists. Assume that he still wants to consume $89,000 now (t = 0), and answer the following.
Assume that capital markets do not exist. Ryan has $89,000 today (t = 0) and will receive $109,000 in exactly one year (t = 1). The graph below illustrates point Y: having $89,000 now and receiving $109,000 next year. Here, if no capital or financial market exists, then Ryan must consume $89,000 now and $109,000 next year. Next consider this case when borrowing and lending at r = 10% are available in the financial markets; Ryan now has a real investment opportunity, or business project. If Ryan decides to accept this opportunity, it will cost $29,500 now (t = 0) and will offer a risk-free payoff of $44,000 next year. Now, revisit the point Y where Ryan has $89,000 now and will receive $109,000 next year, but this time the real asset project exists. Assume that he still wants to consume $89,000 now (t = 0), and answer the following.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Assume that capital markets do not exist. Ryan has $89,000 today (t = 0) and will receive $109,000 in exactly one year (t = 1). The
graph below illustrates point Y: having $89,000 now and receiving $109,000 next year. Here, if no capital or financial market exists,
then Ryan must consume $89,000 now and $109,000 next year. Next consider this case when borrowing and lending at r = 10% are
available in the financial markets; Ryan now has a real investment opportunity, or business project. If Ryan decides to accept this
opportunity, it will cost $29,500 now (t = 0) and will offer a risk-free payoff of $44,000 next year. Now, revisit the point Y where Ryan
has $89,000 now and will receive $109,000 next year, but this time the real asset project exists. Assume that he still wants to consume
$89,000 now (t = 0), and answer the following.
Dollars next year
120000
100000
80000
60000
40000
20000
20000
Y (89000, 109000)
40000
60000
Dollars this year
a. How much more can Ryan consume next year?
Ryan can consume $ 14500
80000
100000
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