Answer to Question #124563 in Microeconomics for Alfred Nunoo

Question

Suppose a firm is considering buying a machine today for $25,000. The use of this
machine in the production process of a commodity causes firms’ net income to rise to
$15,000 in each of the two years. Is it desirable for the firm to purchase the machine?

Answer 1

To decide on whether it is desirable to purchase the machine, we need to compute its net present value. If the machine contributes $15,000 each of the two years, then the present value of these cash flows at a given rate of return should be greater than the machine's cost, which is $25,000, for this decision to be desirable.