Hi,
I have a question about the example 1 blue box on page 127 in book 3 of CFAI.
For question no. 1, I feel that the capital growth will increse because now they have to update their machinary or buy new machines to comply with new regulation. I do not agree with the solution they provided.
Is anybody with me?
If they have to buy fixed equipment i.e. incur capital expenditure , they cannot invest in other growth opportunities short term , such as new market development or bigger sales force. Also the very fact that they have to re-tool with new machinery means they take a 1-time hit on their business short term . After this period is over , they will be current on machinery and their growth rate will be closer to the growth that other industries ( in line with GDP growth )
If they currently have obsolete equipment , they have to take a short term hit , before they re-tool and get back to norm. So I don’t know why you would not agree with the solution
Thanks for your response. I agree that when they take a short time hit, for new machinary, they have a oppotunity cost. When they are done though, they will have newer machines then most of the competitors, so they should be ahead in productivity-right?
there will be an IMMEDIATE downward impact and an upward impact LATER.
So the timeline is crucial in this question.
the other thing to remember - most of these questions are discussed with regards to the one variable being changed. Here Capital Stock Change (delta K/K) is the only point discussed. As they mention –
Thanks. You are right.
Also please note the delta K/K is a negative quantity in this equation and not just a reducing variable.