Coroprate finance question

2008-06-23 7:25 pm

Consider a world with two points in time t0, t1. Nelly Brown has just inherited $5M. She has only two projects she can invest in. Project A costs $3M at t0 and pays off $3.8M at t1. Project B costs $2M at t0 and pays off $2.5M at t1. She can lend and borrow at a bank at an interest rate of 20 percent. Nelly is only interested in consumption today at t0; she does not get any utility from consumption at t1.

a)What is the most Nelly can consume at t0? How does she achieve this(ie. what projects does she do and how much does she borrow or lend at the bank)?

b)How would your answers to a) be changed if Nelly could lend to the bank at a rate of 15 percent but could borrow at 30 percent?

回答 (1)

用戶22404

2008-06-23 11:21 pm

✔ 最佳答案

First of all, the person is willing to give up present consumption and defer consumption to future because the person can yield utility in both present ansd future consumption. Furthermore, interest must be paid in order to compensate the person to defer present consumption to future. Therefore, I am thinking that she must consume all $5 million and borrow as muche as possible for present consumption, in order to get maximum utility from consumption. This is the answer to both parts (a) and (b). Hopes the answers are correct.

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