Microeconomics 15th Edition by James Gwartney,Richard Stroup,Russell Sobel,David Macpherson

Exercise 8

Suppose you are contemplating the purchase of a commercial lawn mower at a cost of $10,000. The expected lifetime of the machine is three years. You can lease the asset to a local business for $4,000 annually (payable at the end of each year) for three years. The lessee is responsible for the upkeep and maintenance of the machine during the three-year period. If you can borrow (and lend) money at an interest rate of 8 percent, will the investment be a profitable undertaking Is the project profitable at an interest rate of 12 percent Provide calculations in support of your answer.