Suppose that you and your four siblings are given an opportunity to purchase a video rental store. Each of you would put up $50,000 . The revenue from the store is expected to remain $350,000 per year for the next several years
The costs (not including the opportunity costs of your investment) of operating the store are expected to remain steady at $320,000 for the next several years. The current market rate of interest is 5 percent per year. Should you go in on this deal? Explain.
The expected profit from the store is $30,000 per year. If the profits are divided equally among the five partners, this amounts to $6,000 per year. This is a 12 percent rate of return on the initial $50,000 investment. Since the expected rate of return is greater than the market rate of interest, you should go in on the deal.
You might also like to view...
Which of the following is correct if there is a favorable supply shock?
a. the short-run aggregate supply curve and the short-run Phillips curve both shift right. b. the short-run aggregate supply curve and the short-run Phillips curve both shift left. c. the short-run aggregate supply curve shifts right and the short-run Phillips curve shifts left. d. the short-run aggregate supply curve shifts left and the short-run Phillips curve shifts right.
In the view of rational expectations theory:
A. People make economic forecasts that are based on insider-outsider relationships and self-fulfilling prophecies B. People form beliefs about future economic outcomes that accurately reflect the likelihood that those outcomes will occur C. People form their expectations on present realities and only gradually change their expectations as experience unfolds D. The economy does not respond quickly to changes in prices, which causes a mis-allocation of economic resources