In the equation , if
Equals zero, investment:
A) is sensitive to tax rate changes.
B) is extremely sensitive to changes in the marginal product of capital.
C) is not very sensitive to real interest rate changes.
D) is insensitive to real interest rate changes.
E) equals zero.

Question

In the equation  , if 
Equals zero, investment:
A) is sensitive to tax rate changes. 
B) is extremely sensitive to changes in the marginal product of capital. 
C) is not very sensitive to real interest rate changes. 
D) is insensitive to real interest rate changes. 
E) equals zero.

Quizplus · Accepted Answer

When the equation equals zero, it means that the net present value of the investment is also zero. This implies that the project's cash flows are exactly enough to cover the initial investment and the required rate of return. Since the NPV is not sensitive to changes in real interest rates, it means that the project does not depend on the interest rate to generate profits. Therefore, the correct answer is D) insensitive to real interest rate changes.

In the Equation , If