Purchase Solution

# expected rate of return

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Suppose a handbill publisher can buy a new duplicating machine for \$500 and the duplicator has a 1-year life. The machine is expected to contribute \$550 to the year's net revenue. What is expected rate of return? If the real interest rate at which funds can be borrowed to purchase the machine is 8 percent, will the publisher choose to invest in the machine? Explain.

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Expected Rate of return = (550-500)/500 = 0.10 or 10%
Rate of interest for borrowing funds = ...

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