   Chapter 29.1, Problem 4ST

Chapter
Section
Textbook Problem

A business firm is thinking of buying a capital good, which will earn $2,000 a year for the next four years and cost$7,000. The interest rate is 8 percent. Should the firm buy the capital good? Explain your answer.

To determine

Identify the present value of capital good.

Explanation

The present value (PV) can be calculated using the formula given below:

PV=An(1+i)n

Here,

An is the actual amount of income.

i is the interest rate.

n is the number of years in the future.

Since An is 2,000 and i is 8%, the present value of $2,000 in a year for 4 years can be calculated using Eqaution-1 as follows: PV=$2,000(1+0.08)1+\$2,000(1+0

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