a decline in discpsable incomeAssume 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%, the firm should

Question

Michelle Shepard

Business

10 January, 08:18

a decline in discpsable incomeAssume 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%, the firm should

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Alisa Blackburn · Answer 1

The firm should purchase the machine.

Explanation:

let the expected rate of return be x:

x = 2000 + 20000x% = 2300

= 300/20

= 15%

Therefore, The expected rate of return (15%) exceeds interest rate (10%) of fund, the firm should purchase the machine.