Macroeconomics 5th Edition by Olivier Blanchard

Exercise 5

A pretzel manufacturer is considering buying another pretzel-making machine that costs $100,000. The machine will depreciate by 8% per year. It will generate real profits equal to $18,000 next year, $18,000 (1 8%) two years from now (that is, the same real profits but adjusted for depreciation), $18,000 (1 8%) 2 three years from now, and so on. Determine whether the manufacturer should buy the machine if the real interest rate is assumed to remain constant at each rate in (a) through (c).
a. 5% b. 10% c. 15%