Calculate the economic service life.

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Chapter 12, Problem 9P

To determine

Calculate the economic service life.

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Name: Problem 1: Managerial Economics, Assignment 5 April 20, 2025 If the sales of your company have grown from $500,000 five years ago to $1,050,150 this year, what is the compound growth rate? If you expect your sales to grow at a rate of 10 percent for the next five years, what should they be five years from now?

1. In this question, assume all dollar units are real dollars in billions. For example, $100 means $100 billion. Argentina thinks it can find $105 of domestic investment projects with a marginal product of capital (MPK) equal to 10% (each $1 invested in year 0 pays off $0.10 in every later year). Assume a world real interest rate r*is 5%, and initial external wealth W (W in year -1) is 0. a. You find that the formula on the lecture slide: > r*, which means that a country will ΔΟ AK take on investment projects as long as the marginal product of capital (MPK) is at least as high as the real interest rate. Using this formula, answer if Argentina should conduct the project. b. If the projects are not done, GDP = Q = C = $200 in all years. Compute the present value of Q and C. c. If Argentina conducts the projects (investing $105), what is the present value of Q and C? d. If Argentina conducts the projects, what is the present value of C? Is Argentina better off with the investment?

2. Consider a world of two countries: Highland (H) and Lowland (L). Each country has an average output of 9 and desires to smooth consumption. All income takes the form of capital income and is fully consumed each period. Initially, there are two states of the world: Pandemic (P) and Flood (F) each occurring with 50% probability. Pandemic affects Highland and lowers the output there to 8, leaving Lowland unaffected with an output of 10. Flood affects Lowland and lowers the output there to 8, leaving Highland unaffected with an output of 10. a. Assume that households in each country own the entire capital stock of their own land. Fill in the numbers on the following table. Pandemic Highland's income Lowland's income Flood Variation about the mean b. Assume that each country owns 50% of the other country's capital. Fill in the numbers on the following table. Pandemic Flood Variation about the mean Highland's income Lowland's income c. Compare your answer to (a) and (b). Does…