A firm must evaluate the value of the services that a piece of capital equipment can deliver to the firm over its lifetime.The firm does this by estimating its

Question

Quizplus · Accepted Answer

The firm evaluates the value of the services that a piece of capital equipment can deliver over its lifetime by estimating its present value. This involves discounting the expected future revenues generated by the equipment back to their present value using a reasonable discount rate. This allows the firm to compare the present value of the equipment's future cash flows to its acquisition cost and determine whether it is a worthwhile investment. Estimates of the equipment's marginal product, marginal revenue product, rate of depreciation, and other factors may be used in calculating the expected future revenues, but the key concept is that the present value of those revenues must exceed the equipment's cost for it to be a profitable investment.

A Firm Must Evaluate the Value of the Services That