Suppose a piece of capital equipment will produce an MRP of $100 000 per year for the next three years (beginning one year from now).What is the maximum price a profit- maximizing firm will pay to purchase it if the annual interest rate is 4%?

Question

Quizplus · Accepted Answer

The maximum price is the present value of the MRP over the three years. The present value is calculated as: $100,000/(1.04) + $100,000/(1.04^2) + $100,000/(1.04^3) = $277,498.

Suppose a Piece of Capital Equipment Will Produce an MRP