3-21. You can buy a machine for $100,000 that will produce a net income, after operating expenses, of $10,000 per year. If you plan to keep the machine for four years, what must the market (resale) value be at the end of four years to justify the investment? You must make a 12% annual return on your investment.

3-21. You can buy a machine for $100,000 that will produce a net income, after operating expenses, of $10,000 per year. If you plan to keep the machine for four years, what must the market (resale) value be at the end of four years to justify the investment? You must make a 12% annual return on your investment.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter1: Introduction And Goals Of The Firm

Section: Chapter Questions

Problem 2.2CE

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Lewis’s management has been considering movingto a new downtown location, and they are concerned that these plans may come to fruition priorto the equipment lease’s expiration. If the moveoccurs then Lewis would buy or lease an entirelynew set of equipment, so management wouldlike to include a cancellation clause in the leasecontract. What effect would such a clause haveon the riskiness of the lease from Lewis’s standpoint? From the lessor’s standpoint? If you werethe lessor, would you insist on changing any ofthe other lease terms if a cancellation clause wereadded? Should the cancellation clause containprovisions similar to call premiums or any restrictive covenants and/or penalties of the type contained in bond indentures? Explain your answer.
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