Investment

And Capital value

Economics Project

In our presentation, we are going to use an example to explain the following concepts:

1) Investment

2) Capital Value

Recently, Marie France Bodyline has invitedChristy as its spokeswoman. According to thereliable news, it hired Christy for

$5,000,000

AH!! YA~~ I agree thatChristy is fit.However, why is the firm willing to spend such a great amount of money in hiring her?

In fact, it is an investment !!!

What is investment???

According to Fisher, investment is something you choose to delay consumption. It is the act of balancing consumption over time. It is the portion of current income that is not consumed and is used instead to create income for the future.

As we all know, all the individualsare wealth maximizers, so as Marie France Bodyline. Its spending of $5,000,000 to hire Christy is to delay current consumption, e.g. buying the goodthat they desired, in order to generate morefuture income.

As Christy is well known and so she can help them to save lots of information cost. When the womensaw the advertisement, they arejust dreaming to have a perfect body line as Christy, leading to an increase in Demand for their services.

In order to investigate whether Marie France Bodyline’s investment is worth or not. We need to calculate its capital value.

What is capital value?

It is the discounted presentvalue of the expected futureincome.

Before our investigation, we need to assume that the market interest rate remains constant at 10% in all the years and there is no other costs involved in their production.

Finally, after 1 year whenContract end, thereare $80,000,000 generated. We can thencalculate its capital value.illustrate of Christy:

Capital Value:Y/ (1+r)* =$80,000,000/(1+0.1)¹ =$72,727,272.73

With this capital value,($72,727,272.73) calculated,we can compare it with the amount of money which Marie France Bodyline spent in hiring Christy ($5,000,000). We findThat the firm can gain $67,727,272.73

Conclusion:We can see that through the

spending of $5,000,000 Marie France Bodyline can generatefuture income of $67,727,272.73. So it is worth investing.

6AChristine HoEmmie LamCandy Lam