A Firm Invests in a New Machine That Costs $5,000

question 128

Multiple Choice

A firm invests in a new machine that costs $5,000 a year but which is expected to produce an increase in total revenue of $5,200 a year.The current real rate of interest is 7 percent.The firm should

• A)undertake the investment because the expected rate of return of 10 percent is greater than the real rate of interest.
• B)undertake the investment because the expected rate of return of 8 percent is greater than the real rate of interest.
• C)not undertake the investment, because the expected rate of return of 6 percent is less than the real rate of interest.
• D)not undertake the investment, because the expected rate of return of 4 percent is less than the real rate of interest.

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Definitions:

Start-Up Process

The series of steps undertaken by entrepreneurs to establish a business, which includes ideation, market research, planning, funding, and launching operations.

Maturity

The stage in life or condition when development is complete and stable, often associated with full growth or an ability to reproduce.

Relative Certainty

The degree of confidence or assurance one has regarding the occurrence of an event or the truth of a statement, often compared to other scenarios or information.

Licensing Agreement

An agreement in which the owner of intellectual property grants another person (or another company) permission to produce that product.