To determine an individual profit-maximizing firm's maximum purchase price for a unit of capital it is necessary to

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To determine the maximum purchase price for a unit of capital, an individual profit-maximizing firm should compute the present value of the stream of benefits produced by the unit of capital. This takes into account the time value of money and the expected future returns from the investment. Knowing what competing firms are prepared to pay (A) may be useful in determining the market price, but it does not necessarily reflect the maximum price the firm can pay. Computing the future value of the benefits produced (C) does not take into account the time value of money, and does not help in determining the maximum purchase price. Computing the rental price of the unit of capital and the interest rate (D) may be useful in determining the cost of capital, but does not provide information on the maximum purchase price. Knowing how the interest rate is related to the cost of capital (E) is important, but does not help in determining the maximum purchase price.

To Determine an Individual Profit-Maximizing Firm's Maximum Purchase Price for a Unit