A mine is for sale for $800,000. It is believed the mine will produce a profit of $250,000 the first year, but the profit will decline $25,000 a year after that, eventually reaching zero, whereupon the mine will be worthless. What rate of return would be earned on the mine

Explanation:

Rate of Return

The rate of return RoR is the net gain or loss on an investment over a time period, expressed as a percentage of the investment's initial cost.

If C1, C2, ..., Cn are the net cash flows at each period of investment, then the actual value of each one of them is

where r is the rate of interest assumed for the investment.

The total value of the cash flows is

We have the final value of the investment at the present time

We can find the r as the RoR of the investment by setting the equation

Simplifying by 25,000 and rearranging

This is a second-degree equation for . Solving the equation we get only one positive value:

Or, equivalently

We get a negative RoR

answer; is usually (less than) the socially optimal level of consumption;

1. c

2. b

3. a

4. c

5. a

6. b

7. c

8. c

9.b

10. d

just took it 100%