1) The US government decides to protect the coal industry. It spends $10 billion yearly for 15 years. The industry starts returning $.3 billion per annum in year 13 and for 50 years following year 13. The Coc is 11%. Derive the decision that is appropriate. 2) Let us say that the protectionism of the coal industry is in the form of a tariff. Talk on the benefits and costs of a tariff. Do the benefits exceed the costs or vise versa? Ascertain you include the terms of trade. Also, what is an optimal tariff?
1.
R = 11%
Period of annual investment = 15 years
Period of cash inflows = 51 years
Then,
PW of the investment = -PW of the investment + PW of cash inflows
PW of the investment = -10*(1-1/1.11^15)/.11 + (.3*(1-1/1.11^51)/.11)*(1/1.11^12)
PW of the investment = -71.13 Billion
Since PW of the investment is negative, so this investment is should not be pursued as an appropriate decision.
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1) The US government decides to protect the coal industry. It spends $10 billion yearly for...
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