Answer:
purchase the machine because the expected rate of return exceeds the interest rate.
Explanation:
Given the cost of machine = $2000
If the firm borrows fund at an interest rate of 10% to buy the machine,
Interest paid on the cost of machine = 10% of $200
= 10/100 × $2000
= $200
Total amount that must be paid back for the machine by the firm = actual cost of machine + interest rate
= $2000 + $200
= $2,200
Since the additional revenue generated from the machine after all operating cost = $2,300
Profit accrued by the firm = Revenue - (actual cost of machine + interest)
Profit accrued by the firm = $2,300-$2200
Profit accrued by the firm on the machine = $100
Based on the profit margin, it can be concluded that the firm can purchase the machine because the expected rate of return exceeds the interest rate.
Note that the expected rate of return is $300 (i.e $2300 - $2000) and the interest rate of is $200 (i.e 10% of $2000)
