Hi, I am working on this problem and I was wondering if someone could check over my work?
Fair corp. operates in the clothing manufacturing industry and currently earns profits of $50 per year. Fair corp has been presented with the option of investing in a new piece of machinery that will allow Fair corp. to earning $100 per year forever (starting one year from now), but will cost the firm $1500 to purchase. Given a discount rate of r=5%, should Fair corp invest in the new machinery?
If they do not invest in the new machinery then they will earn 50/0.05= $1000. If they do purchase the machine then they will earn 100/0.05=2000 but since they have to purchase the machine 2000-1500=$500. Therefore, they should not invest in the new machinery
Thank you for your time
Fair corp. operates in the clothing manufacturing industry and currently earns profits of $50 per year. Fair corp has been presented with the option of investing in a new piece of machinery that will allow Fair corp. to earning $100 per year forever (starting one year from now), but will cost the firm $1500 to purchase. Given a discount rate of r=5%, should Fair corp invest in the new machinery?
If they do not invest in the new machinery then they will earn 50/0.05= $1000. If they do purchase the machine then they will earn 100/0.05=2000 but since they have to purchase the machine 2000-1500=$500. Therefore, they should not invest in the new machinery
Thank you for your time