Suppose a handbill publisher can buy a new duplicating machi

Suppose a handbill publisher can buy a new duplicating machine for $1000 and the duplicator has a 1-year life. The machine is expected to contribute $1090 to the year\'s net revenue. What is the expected rate of return? f the real interest rate at which funds can be borrowed to purchase the machine is 8 percent, will the publisher choose to invest in the machine? Click to selec Will the publisher invest in the machine if the real interest rate is 10 percent? (Click to selec If it is 11 percent? ((Click to selec

Solution

1)What is expected rate of return?

answer:

Expected rate of return = (net revenue - cost) / cost

= (1090 - 1000) / 1000 = 9/100 (decimal: 0.09)

in percentage term 10% = (100*0.09)

= 9% is the expected rate of return.

2) if the real interest rate at which funds can be borrowed to purchase the machine is 8% will the publisher choose to invest in the machine?

Answer:

YES, 9% IS GREATER THAN 8%.

3)will the publisher invest in the machine if the real interest rate is 10%?

Answer:

NO, 9% (rate of return) is less than 10%.

4) if it is 11%?

Answer:

NO, 9% is less than 11%.