This is related to mod 5/sec 3/pg 48&49.
We have long been told the following "high-level" observation:
"Reserve does not affect total profit, only the distribution of profit".
After I read pg 48&49 here, I cannot understand this statement now. If reserve changes, then the interest changes, then the sum of profit also changes. This is the explanation given for the thought question on pg49. And I have verifies the sum of profit does change (in the excel they provided IRR is used as a profit measure, of course it changes as well).
So my question is: how can I understand this "high-level" statement now? I know that to calculate book profit, one relies on \delta reserve (adjusted by survival prob), and when I sum up all the profits, the reserve will cancel out. But it seems to me that the interest component changes and indeed affects the sum of profit ...
Any help/analysis to improve my understanding here is greatly appreciated!
We have long been told the following "high-level" observation:
"Reserve does not affect total profit, only the distribution of profit".
After I read pg 48&49 here, I cannot understand this statement now. If reserve changes, then the interest changes, then the sum of profit also changes. This is the explanation given for the thought question on pg49. And I have verifies the sum of profit does change (in the excel they provided IRR is used as a profit measure, of course it changes as well).
So my question is: how can I understand this "high-level" statement now? I know that to calculate book profit, one relies on \delta reserve (adjusted by survival prob), and when I sum up all the profits, the reserve will cancel out. But it seems to me that the interest component changes and indeed affects the sum of profit ...
Any help/analysis to improve my understanding here is greatly appreciated!
Effect of reserve on profit
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