Two investors have each deposited D with a bank. The bank has invested these deposits in a long-term project. If the bank is forced to liquidate its investment before the project matures, a total of 2r can be recovered, where D > r > D/2. If the bank allows the investment to reach maturity, however, the project will pay out a total of 2R, where R > D. There are two dates at which the investors can make with- drawals from the bank: date 1 is before the bank's investment matures; date 2 is after. For simplicity, assume that there is no discounting. If both investors make withdrawals at date 1 then each receives and the game ends. If only one investor makes a withdrawal at date 1 then that investor receives D, the other receives 2r – D, and the game ends. Finally, if neither investor makes a withdrawal at date 1 then the project matures and the investors make withdrawal decisions at date 2. If both investors make withdrawals at date 2 then each receives R and the game ends. If only one investor makes a withdrawal at date 2 then that investor receives 2R-D, the other receives D, and the game ends. Finally, if neither investor makes a withdrawal at date 2 then the bank returns R to each investor and the game ends.

Two investors have each deposited D with a bank. The bank has invested these deposits in a long-term project. If the bank is forced to liquidate its investment before the project matures, a total of 2r can be recovered, where D > r > D/2. If the bank allows the investment to reach maturity, however, the project will pay out a total of 2R, where R > D. There are two dates at which the investors can make with- drawals from the bank: date 1 is before the bank's investment matures; date 2 is after. For simplicity, assume that there is no discounting. If both investors make withdrawals at date 1 then each receives and the game ends. If only one investor makes a withdrawal at date 1 then that investor receives D, the other receives 2r – D, and the game ends. Finally, if neither investor makes a withdrawal at date 1 then the project matures and the investors make withdrawal decisions at date 2. If both investors make withdrawals at date 2 then each receives R and the game ends. If only one investor makes a withdrawal at date 2 then that investor receives 2R-D, the other receives D, and the game ends. Finally, if neither investor makes a withdrawal at date 2 then the bank returns R to each investor and the game ends.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 5.4IP

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