Suppose Donald Trump has unlimited funds with which to invest and is considering

Question

Suppose Donald Trump has unlimited funds with which to invest and is considering investing in the following projects: Suppose the real interest rate is currently r_1 = 4%. Which projects will actually be invested in? What is the value of total planned investment I^p? Suppose the real interest rate increases to r_2 = 6%. Which projects are now invested in? What is the new value of total planned investment? plot these two points on a graph with r on the horizontal axis and I^p(r) on the vertical axis. Connect them with a line. Find the value of the slope of this line. When r - 0% find total expected returns.

Explanation / Answer

Q-1) If real interest rate is 4% then Wall and Tower projects are eligible to invest the funds because these projects are giving the higher return as compared to real interest rate

Total Planned Investment = 1000+1500 = $ 2500 (Wall and Tower)

Q-2) If real interest rate is 6% then Wall Project is eligible to invest the funds because this project is giving the higher return as compared to real interest rate

Total Planned Investment = 1000(Wall Project)

Q-3) When R=0% then expected return is

Total Expected Return = Amount Invested * Return from the project

Total Expected Return = 1000*10% + 1500*5%+500*1%

                                                = 100+75+5

                                                = 180

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