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 rate of return ($2,300) exceeds the interest rate (10% of $2,000 = $200), which means that the investment in the machine will generate a positive net present value. Therefore, the firm should purchase the machine.

Assume a Machine That Has a Useful Life of Only