In this question assume all dollar units are real dollars in billion; for example, $250means $250 billion. It is year 0. Mexico thinks it can find $250 of domestic investmentprojects with a marginal product of capital (MPK) equal to 15%. Mexico now invests $200 inyear O by borrowing $200 from the rest of the world at a world real interest rate r* of 10%.There is no further borrowing or investment after this.Use the standard assumptions: Assume initial external wealth W (W in year -1) is 0.Assume G = 0 always; and assumel =0 except in year 0. Also, assume NUT = KA - 0and that there is no net labor income so NFIA - w.The projects start to pay off in year 1 and continue to pay off all years thereafter. Interestis paid in perpetuity, in year 1 and every year thereafter. In addition, assume that if theprojects are not done, then GDP-Q-C- $200 in all years, so that PV(Q) = PV(C) -200 + 200/0.10 - 2,200.a. Should Mexico fund the $200 worth of projects? Explain your answer.b. Why might Mexico be able to borrow only $200 and not $250?

The detailed solution is given in Step 2.

Answered: In this question assume all dollar…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 45P: A project does not necessarily have a unique IRR. (Refer to the previous problem for more...

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