Authors libby rittenberg 692

To purchase the tractor, Ms Stein pays $95,000 She will receive additional revenues of $50,000 per year from increased planting and more efficient harvesting, less the operating cost per year of $30,000, plus the $22,000 she expects to get by selling the tractor at the end of five years The net present value of the tractor, NPV0 is thus given by: NPV0=−$95,000+$20,000+$20,000+$20,000+$20,000+$42,000=$2,690 1.07 1.072 1.073 1.074 1.075 Given the cost of the tractor, the net returns Ms Stein projects, and an interest rate of 7%, Ms Stein will increase her profits by purchasing the tractor The tractor will yield a return whose present value is $2,690 greater than the return that could be obtained by the alternative of putting the $95,000 in a bond account yielding 7% Ms Stein’s acquisition of the tractor is called investment Economists define investment as an addition to capital stock Any acquisition of new capital goods therefore qualifies as investment The Demand Curve for Capital Our analysis of Carol Stein’s decision regarding the purchase of a new tractor suggests the forces at work in determining the economy’s demand for capital In deciding to purchase the tractor, Ms Stein considered the price she would have to pay to obtain the tractor, the costs of operating it, the marginal revenue product she would receive by owning it, and the price she could get by selling the tractor when she expects to be done with it Notice that with the exception of the purchase price of the tractor, all those figures were projections Her decision to purchase the Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 692