Consider a manufacturing firm that contemplates buying a lathe with an annual MRP of $1000 (beginning one year from now).Suppose the interest rate is 5% per year.If the lathe is obsolete after the fourth MRP is generated,the maximum the firm is prepared to pay now for the lathe is

Question

Quizplus · Accepted Answer

To find the maximum price the firm will pay now, we need to calculate the present value of the stream of MRPs:

PV = MRP1/(1+i) + MRP2/(1+i)^2 + MRP3/(1+i)^3 + MRP4/(1+i)^4

Where i is the annual interest rate.
Substituting the values in the above formula, we get:
PV = 1000/(1+0.05) + 1000/(1+0.05)^2 + 1000/(1+0.05)^3 + 1000/(1+0.05)^4
PV = $3546.40

Therefore, the maximum the firm is prepared to pay now for the lathe is $3546.40.

Consider a Manufacturing Firm That Contemplates Buying a Lathe with an Annual