a. Suppose a newsprint publisher can buy a new duplicating machine for $100,000 and the...
- a. Suppose a newsprint publisher can buy a new duplicating machine for $100,000 and the duplicator has a
1-year life. The machine is expected to contribute $12,000 to the year’s revenue. (for this problem assume not other costs for the firm)
What is the expected rate of return on this investment for the year? (note: rate of return is not a $ profit figure but a rate=%)
Ans.________
b. If the interest rate at which funds can be borrowed to purchase the machine is 12.8 percent, will the publisher choose to invest in the machine? YES/NO and why..
Homework Answers
Price of machine = $ 100,000
Revenue from machine = $ 12,000
Return from machine = $ 12,000 - $ 100,000 = - $ 88,000
Expected rate of return = (-88,000/100,000)*100 = 1=-88%
B. No the publisher would not invest as irate of return is -88% and borrowed fund costs 12.8%. Therefore, firm must not invest.
From the given values this answer can be derived. Please contact if having any query thank you.
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What is the NPV?
r=9.28
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