tractor depends almost entirely on the costs and benefits she expects will be associated with its use Finally, Ms Stein converted all those figures to a net present value based on the interest rate prevailing at the time she made her choice A positive NPV means that her profits will be increased by purchasing the tractor That result, of course, depends on the prevailing interest rate At an interest rate of 7%, the NPV is positive At an interest rate of 8%, the NPV would be negative At that interest rate, Ms Stein would better to put her funds elsewhere At any one time, millions of choices like that of Ms Stein concerning the acquisition of capital will be under consideration Each decision will hinge on the price of a particular piece of capital, the expected cost of its use, its expected marginal revenue product, its expected scrap value, and the interest rate Not only will firms be considering the acquisition of new capital, they will be considering retaining existing capital as well Ms Stein, for example, may have other tractors Should she continue to use them, or should she sell them? If she keeps them, she will experience a stream of revenues and costs over the next several periods; if she sells them, she will have funds now that she could use for something else To decide whether a firm should keep the capital it already has, we need an estimate of the NPV of each unit of capital Such decisions are always affected by the interest rate At higher rates of interest, it makes sense to sell some capital rather than hold it At lower rates of interest, the NPV of holding capital will rise Because firms’ choices to acquire new capital and to hold existing capital depend on the interest rate, the demand curve for capital in Figure 13.2 Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 693