Business, 19.02.2021 16:40 Easton777

Suppose that you are running a business and you need some extra space for one year. Your bank offers you a loan of $200,000 at 0% interest. You consider borrowing this amount, buying the building, using it for one year, and then selling the building to pay back the loan. Unfortunately, the economy in which you are operating is experiencing deflation at a rate of 10% per year. After one year, you should be able to sell the building for _.

Suppose that owning the building for a year would earn you $5,000. To decide whether or not you will be better off by owning it for one year and then selling it, you sought advice from three different people: (1) Your brother says that you should not buy the building because in one year it will cost you $100,000. (2) Your accountant says that you should definitely buy the building because you can borrow $100,000 at zero interest while the building will generate $5,000 in extra income. Then when you sell it, you will be $5,000 richer. (3) Your bookkeeper says that if you sell the building in a year, you will have to come up with more money to pay off the loan than you will make in extra income.

Keeping in mind that the economy experiences deflation at the rate of 10%, yourbookkeeper is right because:

a. When the nominal interest rate is zero, you do not incur any cost when you take out a loan.
b. The extra income you will earn will be less than the cost of owning the building for the year.
c. When the nominal interest rate is zero, the cost of a building is its full purchase price

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