Question
We are considering purchasing a piece of rental equipment for $135,000 and renting it to construction contractors. Since we are optimistic about the future, we
We are considering purchasing a piece of rental equipment for $135,000 and renting it to construction contractors. Since we are optimistic about the future, we expect we can rent this equipment for five years, with net rental income being $30,000 in the first year and $40,000, $50,000, $60,000 and $70,000 in each succeeding year, respectively. However we expect repair costs to go up each as well, starting with $5000 in the first year and increasing $1000 each year. We also think we will be able to sell it for $25,000 at the end of five years. Since the equipment rental business is risky, we have set a required rate of return of 20% for this study. Should we undertake this investment? Why or why not. Write in the cell below.
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