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Expected to generate profits

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A firm is considering the purchase of a machine that is expected to generate profits of $100,000 per year. The interest rate is 3%. After seven years of operation, the firm expects to be able to sell the machine as scrap for $85,000. How much should the firm be willing to pay to undertake this investment? Explain. Now, assume that the depreciation rate on the machine is 9% per year (i.e., the profits decrease by 9% per year) but the scrap value remains $85,000 (at the end of the 7th year). How much should the firm be willing to pay to undertake this investment? Explain.

Reference no: EM131638498

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