1.

With an increase in investment from 40 to 50, the equilibrium return increased

from 300 to 345. Find the multiplier of total costs and the marginal propensity
to consumption.

Decision

Calculate the multiplier of total costs:

M = DWP / ΔI
The total cost multiplier is inversely proportional to the marginal propensity to save:
MPS = 1 / M.
It is known that MPC + MPS = 1. Therefore, the marginal propensity to consumption
will be:
MPC = 1 – MPS.
 2. The acquisition of one of the two machines is being considered, and it is Expected
that their operation will generate income for 2 and 3 years, respectively (table. 1).
Opportunity costs are 10%. Calculate the net present value of each machine. What
kind of car should I buy?
Given: Decision:
Cash flows for projects A and B, USD. r = 0,1 We use the standard formula of net present value:

Cash flows (in thousand USD.)

Machine

А -100 110 121 —

B -120 110 121 133

Based on the indicator of net present value, you should choose the machine ….., because NPV
in this project more. However, it should be remembered that the NPV criterion is used when
comparing different-scale projects. Here, projects have different scales in terms of both
investment and service life. Therefore, it is necessary to attract the criterion of return on
investment-PI:P = PV / K (NPV+K)PI (A) = …………..%;
PI (B) = ……………………..%.
Project ………… should also be preferred for this criterion.
Answer: the machine should be selected…….
 3. The company has two projects, A and B. Each project has costs of 10 thousand USD.,
opportunity costs for each project are 12%. The expected cash flows generated by these
projects are presented in table 1.

Table 1 - cash flows for two projects, A and B

Year Project A Project B

0 -10000 -10000

1 6500 3500
Decision:
2 3000. 3500 ( a) Calculation of payback period. Project
3 3000 3500
payback, a (years):
4 1000 3500

a) calculate the payback period, net present value,

internal rate of return for each project;
b) decide which project should be adopted if they
are independent;
c) decide which project should be adopted if they are
mutually exclusive;
d) assess how a change in the discount rate could
lead to a conflict in the ranking of these two projects
by net present value and internal rate of return;
e) answer the question, which project is preferable -
at r = 4,5% or at r = 8 %?
The expected revenue flow varies from
year to year, the payback period can be
determined by summing the revenues by
year until their amount is equal to the
initial investment. After 2 years, the
accumulated income of 9.5 thousand USD
(6.5 + 3) less capital investment, 3 years-
12.5 thousand USD .6,5 + 3 + 3) - more.
1.The exact calculation of the payback period:

In case of independence, both projects should be accepted, because the payback period
does not exceed the life of the projects. If you should choose one, the project is more
preferable, And having a shorter payback period.

2. Net present value:

If independent, both projects should be accepted, as the NPV for both projects is positive.
If one is to be chosen, the project is preferred, And having a higher net present value.

3. Internal rate of return:

As r1, we use the initial discount rate of 12%. Take, for example, 20% as r2.Calculate the
NPV at the rate of 20 %:

In case of independence, projects should be accepted if PI does not exceed the cost of
funds raised. If you choose one, the project is more preferable, And having a greater
internal rate of return.
b) for all the criteria considered, both projects are acceptable. Thus, both projects should
be accepted if they are independent.
c) the alternative project should choose project A. He is better in all respects.
d) Find r, in which the NPV of the two projects are equal (Fisher's point):
 Multiply both sides of the equation by

Substitute in the left part r = 6 % and r = 7 %. In

the first case, the left side of the equation:

Now take

Since there is a Fisher point, a conflict of

criteria when choosing an investment project
is possible.
If r < 6.2 %, the project B, the worst on the
criterion of the IRR turns out to be the best
according to the criterion of NPV (see Fig. 1).

e) If the value of the firm's capital

= 4.5 %, as a 4.5 % < of 6.2 %, a conflict exists: on
the criterion of NPV project B is better because
NPVA< NPVB In confirmation, we will calculate the NPV at the rate of 4.5 %:
Answer: for all the criteria considered, both projects are acceptable. Thus, both projects
should be accepted if they are independent. If the project is alternative, the project should
be selected. if the discount rate is lower than 6.2 %, there is a conflict of criteria: the
project is worse than the project in terms of net present value.