Suppose a piece of capital equipment offers its last MRP of $40 000 in one year,after which it is valueless.At an annual interest rate of 8%,a profit-maximizing firm would be willing to buy this unit of capital if its purchase price is

Question

Quizplus · Accepted Answer

To find the maximum price that the firm would be willing to pay for the capital equipment, we can use the Present Value formula:
PV = MRP / (1 + i)^n
where PV is the present value, MRP is the future market resale price, i is the annual interest rate, and n is the number of years.
Plugging in the values: 
PV = 40,000 / (1 + 0.08)^1 = $37,037.04
Therefore, a profit-maximizing firm would be willing to buy this unit of capital if its purchase price is below $37,037.04. Choice A is the correct answer.

Suppose a Piece of Capital Equipment Offers Its Last MRP