Exhibit 13-3

-Exhibit 13-3 gives data on the number of tools a certain firm buys to use in its production process. Assume that the tools are expected to last indefinitely, that operating expenses are negligible, and that the price of the firm's output is expected to remain constant in the future. At what interest rate would the firm in Exhibit 13-3 choose not to buy any machines?

Question

Exhibit 13-3
 
-Exhibit 13-3 gives data on the number of tools a certain firm buys to use in its production process. Assume that the tools are expected to last indefinitely, that operating expenses are negligible, and that the price of the firm's output is expected to remain constant in the future. At what interest rate would the firm in Exhibit 13-3 choose not to buy any machines?

Quizplus · Accepted Answer

The firm would choose not to buy any machines when the interest rate is so high that the present value of the future benefits from the machines is less than or equal to the cost of the machines. At 40%, the cost of capital is likely too high for the investment to be justified.

Exhibit 13-3 -Exhibit 13-3 Gives Data on the Number of Tools a Number