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Characteristics of Future Profits from Investment
When firms assess potential investment projects, the anticipated profits are characterized by two key features. First, these profits are often expected to materialize over an extended period, sometimes many years in the future. Second, these future profit streams are almost always subject to uncertainty and are not guaranteed.
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Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Impact of Increased Expected Profits on Aggregate Investment
Imagine an economy where two events occur simultaneously: 1) The central monetary authority significantly lowers the cost of borrowing for businesses. 2) A major technological breakthrough is announced, which is widely expected to dramatically increase the future profitability of new business ventures. Based on the primary factors that influence the total level of investment, what is the most likely outcome of these two events combined?
Investment Decision at a Manufacturing Firm
Interest Rates and Investment Decisions
A manufacturing firm has evaluated a potential factory expansion project. The initial cost to build the factory and the expected annual revenue from the factory over the next 20 years are both known and fixed. The firm's management will only approve the project if its calculated profitability meets a certain threshold. Which of the following scenarios would be most likely to cause the firm to REJECT a project that it would have previously accepted?
Evaluating Economic Policies to Stimulate Investment
True or False: If a firm's expectation of future profits from a potential investment project is sufficiently high, the project will be undertaken regardless of the current interest rate.
Suppose that in a given year, the total level of investment spending by firms in an economy increases substantially, while the prevailing interest rates have remained stable. Which of the following scenarios provides the most plausible explanation for this change?
A country's central bank raises the primary interest rate to combat inflation. Simultaneously, a new international trade agreement is signed, which is widely expected to open up large, profitable new markets for the country's businesses. What is the most likely overall effect on the country's aggregate investment level?
Match each economic scenario with its most likely direct impact on the total level of investment in an economy.
Reconciling Investment Growth with Higher Borrowing Costs
Characteristics of Future Profits from Investment
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Evaluating a Pharmaceutical Investment
A firm is comparing two investment options. Project A involves upgrading existing machinery, which will yield modest but highly predictable profit increases over the next 5 years. Project B involves building a new factory in an emerging market, which has the potential for very large profits, but these would not begin for 7 years and are subject to significant geopolitical risk. How do the core characteristics of future investment profits complicate the firm's decision between these two projects?
Comparing Investment Profit Profiles
A firm can accurately calculate the total return on a 10-year investment project by simply summing up the projected annual revenues, because future economic conditions are generally stable and predictable.
Evaluating Short-Term Investment Horizons