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Question

Problem 1 (3 pts) - Concepts
a)Explain the concepts of fixed cost versus variable cost. Alsocontrast the concept of fixed cost to sunk cost.
b)Explain what “interest” is (in the financial sense). Brieflydiscuss the main reasons for interest being widely accepted andused in the modern economy.
c)Explain the concept of “capitalized worth”, relating it to theeconomic concept of “rent”.
d)Explain the “internal rate of return” by relating it to the PWof a project and the MARR. Also discuss its advantages as adecision metric and its shortcomings.



Solution

x.xxxxxxxx cost xx the xxxxxxy&#xxxx;x xxxx xxxxxxxxxx with xxx quantityof xxxxx xx xxxxxxxx it xxxxxxxx. Variable xxxx xxy xxxxxxxx ordecrease xxxx the xxxxxxxxxx xxxxxx. xxx example xx a xxxxxxyxxxxxxxxxxxx xxxxx xxx cost xx $2. xx xxx xxxxxxy produces xxxxxxxx its xxxxxxxx xxxx xxxx be $xxxx. However xx xxx xxxxxxy doesnot xxxxxxxxxxxx any xxxxx xxxx xxx variable xxxx will xx zxxx xxxxxxxxx it xxxx not xxxx xxy xxxxxxxx cost xxx producing xxxxx.xx xxx xxxxx hand xxxxx cost xxxx xxx xxxxx with xxx amount xxxxxxx xx xxxxxxxx a xxxx produces. xx xxxx xxx vary xxxx productionvolume; xx xxxxxxx xxxx even xx no xxxxx xx xxxxxxxx are xxxxxxxx.xxxxx the xxxx xxxxxxx xxxxx, if xxx company xxx x xxxxx cost xx$xx,xxx per xxxxx xxx xxx machine xx uses xx xxxxxxx xxxxx. Ifcompany xxxx not xxxxxxxxxxx xxy xxxxx for xxx month, xx xxxxxxxxxx xxxx to xxy $12,000 xxx xxx xxxx of xxxxxxx the xxxxxxx.xxxx xxxx xx that xxxxxxxx cost xxxxx xxxx xxx company xxxxx.xxxx cost xxxxx xxx xx refunded. xxx example xxxxxxxxxxxx xx x sunkcost.

b.

Interest xx a xxx xxxxx xx paid xy the xxxxxxxx xxx xxx use xxxxxxxxx party’s xxxxy. xxx xxxxxxxx who xxxxx loan xxx xxxxxxxxxxxxxx, xxx or xxx any xxxxx xxx xxxx, in xxxxxx they xxxx xx xxyxxxxxxxx for xxxxxxx money xx xxx xxxxxxxxx amount. xxxxxxxx iswidely xxxxxxxx xxx xxxx in xxxxxx economy xxxxxxx xxxxxxxy xx themoney xxxx in xxx xxxxxxx xxxxxxy is xxxxxxx by xxxxx xxxxx xyxxxxx. This xxxxy is xxxxxxx xy xxx monetary xxxxxy used xy xxxxxxxxxx xxxxx which xxxxxxxx setting xx xxx xxxxxxxx rates.

c.

Capitalized xxxxx is x xxxxxx xxxxx is xxxx to xxxxxxxxx xxxxxxxxxx xxxxx of xxx revenues xxx xxxxxxxx xxx an xxxxxxxx periodof xxxx.x.xxx xxxxxxxx xxxx of xxxxxx (IRR) xx xxx xxxxx-xxxx interestrate xxxxx equals xxx xxx xxxxxxx value xx a xxxxxxx xxxx xxxx inand xxx.xx (IRR) = xx (xxxx in) &#xxxx; PW (xxxx xxx)&#xxx;&#xxx;&#xxx;&#xxx;&#xxx;&#xxx;&#xxx;&#xxx;&#xxx;&#xxx;&#xxx;&#xxx;&#xxx;&#xxx;&#xxx;= xxxxxxxxxxx of xxx:xx helps xx xxxxxxxx xxx feasibility xx a xxxxxxx xyxxxxxxxxxxx xxx time xxxxx of xxxxy.xxxx xxxxxx xx simple xx calculation xxx xxxxxxxxxxxxxx.xx xxxx not xxxxxxx the xxxxxxxxxxx xx xxxxxx rate, xxxxx is xxxxxxxx xxxxxxxxxxxxxxxxxxxx xx IRR:

  • It xxxxxxx economies xx xxxxx x.x. the xxxxxx benefit xx xxxxxxx xxxxxx value.
  • The xxxxxxxx assumption xxxx xx xxx regarding xxxxxxxxxxxx rateis xxxxxxxxxxx.

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