Assume That a Machine, Which Has a Useful Life of Only

question 72

Multiple Choice

Assume that a machine, which has a useful life of only one year, costs $2,000.Also, assume that the difference between the estimated operating costs, which includes power and taxes, and the additional revenue from the output of this machine is expected to be $2,300.If the firm finds that it can borrow funds at an interest rate of 10 percent per annum, the firm should:

• A)not purchase the machine because the expected rate of return exceeds the cost of borrowing.
• B)purchase the machine because the expected rate of return exceeds the cost of borrowing.
• C)not purchase the machine because the cost of borrowing exceeds the expected rate of return.
• D)purchase the machine because the cost of borrowing exceeds the expected rate of return.

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Definitions:

Luxury Item

A good or service that is considered non-essential but is desirable as it offers a sense of extravagance or comfort.

Household Budget

An itemized summary of expected income and expenses for a defined period of time, typically for a household.

Price-Elastic

Describes a situation where the demand or supply for a good or service significantly changes in response to price changes.

Price Elasticity

A measure of the responsiveness of quantity demanded or supplied to a change in price.