Assume a machine that has a useful life of only one year costs $2,000.Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300.If the firm finds it can borrow funds at an interest rate of 10 percent, the firm should
A)not purchase the machine, because the expected rate of return exceeds the interest rate.
B)not purchase the machine, because the interest rate exceeds the expected rate of return.
C)purchase the machine because the expected rate of return exceeds the interest rate.
D)purchase the machine because the interest rate exceeds the expected rate of return.

Question

Quizplus · Accepted Answer

The expected revenue from the machine is $2,300, which exceeds the cost of $2,000. The net gain is $300. The interest cost on borrowing $2,000 at 10% is $200. Since the net gain ($300) is greater than the interest cost ($200), the expected rate of return exceeds the interest rate, making it beneficial to purchase the machine.

Assume a Machine That Has a Useful Life of Only