Question
Suppose you are a farmer considering purchasing a new combine harvester. This combine lowers your harvesting costs by $50,000 per year (starting in year t
Suppose you are a farmer considering purchasing a new combine harvester. This combine lowers your harvesting costs by $50,000 per year (starting in year t = 1) but costs $8,000 per year to maintain (also starting in year t = 1). Your discount rate is 5%. (a) If you can sell the combine for $150,000 at the end of the 10th year (t = 10). What is the most you would be willing to pay for this combine in time t = 0 if you have to pay for it up front? (2 points) (b) Suppose you have the money to buy this combine, but you dont want to tie up all your capital in a large purchase. Whats the highest interest rate you would be willing borrow money from the bank? (No math actually needed.)
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