1. Which asset classes generally offer higher average rates of returns? Why? 2. You have $100...

1. Which asset classes generally offer higher average rates of returns? Why?
2. You have $100 in cash. The prevailing interest rate is 20% per annum. You have two investment choices: a) Project costs $100 and will return $150 next year, b) Ice Cream—and you love ice cream. The problem is you know that you will be dead next year. What should you do?
3. Does project value depend on when you need cash? In our perfect world, can you make your decision on investment and consumption choices separately, or do you need to make both of them at the same time?
4. Assume that we believe that the expected cash flow is $500 and the expected rate of return (cost of capital) is 20%. This is a 1-year project. Is it worse to commit an error in cash flows or in the cost of capital? Does your conclusion change if this is a 50-year project?

Expert Solution

jeff jeffy answered 8 months ago

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