Explanation Effect on NPV calculation: For the incumbent firm, if the only change in the cash flow is disposal of an initial pre-2015 $60 million R&D expenditure. In such a case, the NPV calculations mentioned in Table 15.5 in page 569 will simply increase their value by $60 million for each of the discount rate. The new NPV and the discount rate as a result are shown in Table 1. Table 1 Discount rate 0.05 0.10 0.15 NPV 140.5 ( 80.5 + 60 ) 43.1 ( − 16.9 + 60 ) -15.1 ( − 75.1 + 60 ) Profitability of investment: Recalculation of NPV at the discount rate of 12% is required to determine if the investment is profitable. Typically, when an equivalent amount of income or payment A is made for N years at discount rate R, the net present value is calculated using the following formula: PDV = A × ( ( 1+R ) N − 1 R ( 1+R ) N ) (1) Since the net cash flows received for initial pre-2015 are -$60 million ( − 120 + 60 ) , -$93.4 million for the 2 nd year (2015), -$56.6 for the third year (2016), and $40 million for the rest of the 13 years (2017-2030), then the net present value of payments at the discount rate of 12% is calculated using Equation (1). Time period N is 15 years and N1 is two years. NPV = ( Net cash flow 0 ( 1 + R ) 0 + Net cash flow 1 ( 1 + R ) 1 + Net cash flow 2 ( 1 + R ) 2 + Equivalent cash flow ( ( 1+R ) N − 1 R × ( 1+R ) N ) − ( ( 1+R ) N1 − 1 R × ( 1+R ) N1 ) ) = − 60 ( 1 + 0.12 ) 0 + − 93.4 ( 1 + 0.12 ) 1 + − 56.6 ( 1 + 0

Microeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (9th Edition) (Pearson Series in Economics)

9th Edition

ISBN: 9780134643175

Author: Robert Pindyck, Daniel Rubinfeld

Publisher: PEARSON

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Chapter 15, Problem 10E

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Net present value recalculation.

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Chapter 15, Problem 9E

Chapter 15, Problem 11E

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and u (C1, C2) = 1/2 = f) Derive analytically and show graphically the solution under other util- ity functions such as u (C1, C2) ac₁+bc2 where a, b > 0, u (C1, C2) = ac₁+bc1/2 acbc2 (assume that the agent is sufficiently rich to avoid the corner solution). What of these utility functions reflects best your own preferences (or indicate other utility function that represent your pref- erences).

Chapter 15 Solutions

Microeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (9th Edition) (Pearson Series in Economics)

Ch. 15 - Prob. 1RQ Ch. 15 - Prob. 2RQ Ch. 15 - Prob. 3RQ Ch. 15 - Prob. 4RQ Ch. 15 - Prob. 5RQ Ch. 15 - Prob. 6RQ Ch. 15 - Prob. 7RQ Ch. 15 - Prob. 8RQ Ch. 15 - Prob. 9RQ Ch. 15 - Prob. 10RQ

Ch. 15 - Prob. 11RQ Ch. 15 - Prob. 12RQ Ch. 15 - Prob. 13RQ Ch. 15 - Prob. 1E Ch. 15 - Prob. 2E Ch. 15 - Prob. 3E Ch. 15 - Prob. 4E Ch. 15 - Prob. 5E Ch. 15 - Prob. 6E Ch. 15 - Prob. 7E Ch. 15 - Prob. 8E Ch. 15 - Prob. 9E Ch. 15 - Prob. 10E Ch. 15 - Prob. 11E Ch. 15 - Prob. 12E

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