a) The market expected return is 7%, the risk-free rate is 2%. A firm has a beta of 1.5. If it keeps its current machine it will produce $100 for 5 years. It can also buy a new machine that costs $80 and would increase annual production by $20 compared to the old machine.

b) Should the firm invest in the new machine?

c) Suppose instead that the new machine allows you to grow production by 20% each year starting from $100 in year 1. Would you invest?