Explain how many car companies will buy a new car assembly

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Reference no: EM1361706

Suppose that five car companies are considering borrowing $5,000 each to buy a new car assembly machine. If a company decides to buy the new machine, then they must borrow $5,000.

The annual real returns on these machines, also known as the value of marginal product of capital, are shown in the table below. The value of marginal product of capital is revenue net of operating costs, taxes, and opportunity costs, but it does not account for the interest payment. Assume that the car assembly machines can always be resold at their original price.

Company Value of Marginal Product of Capital (per Year)

A $550
B $450
C $350
D $250
E $150

If the annual real interest rate on the loans is 6%, explain how many car companies will buy a new car assembly machine? Interest payments are made once a year.

Reference no: EM1361706

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