The Investment Schedule - Suppose there is a firm

The Investment Schedule - Suppose there is a firm

The Investment Schedule. Suppose there is a firm that is considering whether to build a new factory. The factory will cost $100 to construct today, and will yield revenue of $110 a year from now. (For simplicity, we will assume the factory yields no further returns in future years).  (a) What is the return on capital from constructing the factory? (b) Will the ?rm build the factory if the interest rate is 7%? If it is 12%? Explain. Now suppose that instead of one ?rm, there are many ?rms that are considering whether to build a factory, each of which costs $100 to construct. The ?rst factory will yield rev- enue of $120, the second revenue of $119, the third $118, and so on, decreasing by $1 for each additional factory built.  (c) Use the numbers above to draw the investment demand schedule for the economy.  (d) Suppose that the interest rate is 7%. What will be the level of investment in the econ- omy? (Note: you may assume that ?rms will build factories that just break even.)