Suppose a firm is considering the purchase of a machine which would increase its total revenues by $10,000 for the year. The machine costs $8,000 and has a useful life of one year. The interest rate is 20 percent. This investment should

Question

Quizplus · Accepted Answer

The rate of return for this investment can be calculated as follows:
Return = Total revenue - Cost of machine
Return = $10,000 - $8,000
Return = $2,000
Rate of return = Return on investment / Cost of investment x 100%
Rate of return = $2,000 / $8,000 x 100%
Rate of return = 25%
Since the interest rate is 20%, the rate of return on this investment is 5% greater than the interest rate. Therefore, the investment should be undertaken.

Suppose a Firm Is Considering the Purchase of a Machine