Question
A company has a nominal discounting rate of 20%. By law it has to buy a machine tosterilize the instruments used in its manufacturing process.
A company has a nominal discounting rate of 20%. By law it has to buy a machine tosterilize the instruments used in its manufacturing process. It will buy one of two machines, and once it has decided which machine to buy, will continue to do so in perpetuity. Machine A costs $800 today, and will incur operating costs of $300 per year in real terms (paid at the end of the year) for 6years, after which it will expire worthless. Machine B costs $500 today, and will incur operating costs of $320per year in real terms(paid at the end of the year) for 4years, after which it will expire worthless. Ignore taxes and depreciation. Which machine will the firm prefer if the inflation rate is: a) 5% b) 15%
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