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Sept 2009 - Q10

M

maz1987

Member
Am I using this forum too much? I don't see how there are so many people doing this exam and yet just a handful of people utilising this forum. Anyway, even so I appreciate the help I am getting here.

I have a question (or two) regarding question 10 of the Sept 2009 paper.

Firstly, I found this a pretty tough paper, but not impossible. It's very dissimilar to previous (and subsequent) papers.

Anyway, in Q10 we are told that costs and benefits become zero through the carbon technology. Therefore, when working out the equation of value, the first two costs are now considered benefits. But why just these two costs and not the third cost, nor the benefit is now considered a loss? Surely the fact that the $40bn is also a saving, while the $10bn gets lost because of crops/heating.

Secondly, we are told the Real Rate = 4%, we are led to assume inflation is 1% (although I only knew this from looking at the answers) and therefore the Money Rate is 2.97%. The formula used is:

1 + MR = (1 + RR) / (1 + Infl)

However the notes tells us that

1+ MR = (1 + RR) x (1 + Infl).

So what am I missing? Could it be that 2.97% isn't really the Money Rate, and is in fact another rate? And also, why does the inflation only apply to the $20bn, and nothing else?


Thanks
 
I thought this paper was horrible tbh and I hope we don't get one like this.
This question took so long to read that it's easy to make a mistake on it.
The third cost is 40b occurring annually in arrears and the benefit forgone is 10b occurring annually in arrears so you'll see from the solution that they have net these to a positive 30b.
I think you may have misread the part about the continuous costs of 20billion which is increasing annually by 1%- this is why they are discounting at 2.97%to take account for the increase. I don't think this has anything to do with inflation.
 
AH! Ok so they've just made the calculation easier for themselves by working out the annuity at a revised rate rather than taking into account the real rate on top of the 1% annual increase. That makes sense!

Yes, it was a horrible paper, but I guess we have to be prepared for anything that comes our way!
 
I did the september 09 exam.
Question 10 was brutal,but one could pick up marks here and there,and the rest of the paper was pretty much very okay.
 
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