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a lathe with an annual MRP of $1000 (beginning one year from now).Suppose the interest rate is 5% per year.If the lathe is obsolete after the fourth MRP is generated,the maximum the firm is prepared to pay now for the lathe is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 amount the firm is prepared to pay today, we need to calculate the present value of the future MRPs. 
Using the formula for the present value of an annuity:

PV = C * (1 - (1 + r)^-n) / r

Where PV is the present value, C is the annual MRP, r is the interest rate, and n is the number of MRPs.

So in this case, PV = $1000 * (1 - (1 + 0.05)^-4) / 0.05 = $3546.40

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

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