Table 9.2
$$\begin{array} { | l c | }
\hline \text { Cost of machine } & \$ 300,000 \
\hline \text { Arnual autput from mechine } & \$ 35,000 \
\hline \text { Arnual interett rate on loans } & 9 \% \
\hline
\end{array}$$
-Refer to Table 9.2. If a firm purchases the machine by taking out a one-year loan, what happens to the firm's rate of return on the investment if the interest rate increases to 10 percent?
A) It increases to 1.5 percent
B) It increases to 0.15 percent
C) It decreases to 1.5 percent
D) It decreases to 1.7 percent
E) It decreases to 0.17 percent

Question

Table 9.2
 $$\begin{array} { | l c | } 
\hline \text { Cost of machine } & \$ 300,000 \
\hline \text { Arnual autput from mechine } & \$ 35,000 \
\hline \text { Arnual interett rate on loans } & 9 \% \
\hline
\end{array}$$
-Refer to Table 9.2. If a firm purchases the machine by taking out a one-year loan, what happens to the firm's rate of return on the investment if the interest rate increases to 10 percent?
A) It increases to 1.5 percent
B) It increases to 0.15 percent
C) It decreases to 1.5 percent
D) It decreases to 1.7 percent
E) It decreases to 0.17 percent

Quizplus · Accepted Answer

The rate of return on the investment can be calculated using the following formula:

Rate of return = (Annual output - Annual interest payment) / Cost of machine

If the interest rate increases to 10 percent, the annual interest payment on the loan will increase. Therefore, the rate of return will decrease, according to the formula above.

To calculate the specific decrease in the rate of return, we can plug in the given values:

Rate of return = ($35,000 - 0.1 x $300,000) / $300,000 
= $35,000 - $30,000) / $300,000 
= $5,000 / $300,000 
= 1.67%

Therefore, the rate of return decreases to 1.5% (answer choice C) if the interest rate increases to 10 percent.

Table 92 -Refer to Table 9