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In Keynesian theory of investment, suppose an asset costs $1000 and it is expected to yield...

In Keynesian theory of investment, suppose an asset costs $1000 and it is expected to yield $600 at the end of year 1 and $600 at the end of the second year (and zero thereafter), then r* (rate of return associated with marginal project) will be

a) 10%

b) 11%

c) 12%

d) 13%

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Answer #1

The present value should be 0

-1000 + 600*(1 + r)^-1 + 600*(1 + r)^-2 = PV = 0

For interest rate of 10%, PV is 41.32. For interest rate of 11%, PV is 27.51. For interest rate of 12%, PV is 14 and for 13%, PV is 0.8

Select D) 13%.

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