A Firm Is Considering the Purchase of a Capital Good

question 148

Multiple Choice

A firm is considering the purchase of a capital good that will generate an additional $400 income each year for 4 years (after which time the capital good is useless and has no scrap value) . The capital good will cost $1,600. If the interest rate is 3 percent, it follows that the firm should

• A)purchase the capital good.
• B)not purchase the capital good.
• C)purchase the capital good only on the condition that the expected inflation rate is greater than the nominal interest rate.
• D)not purchase the capital good since the expected inflation rate is less than the real interest rate.
• E)There is not enough information to answer the question.

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