A Firm Invests in a New Machine That Costs $2,000

Multiple Choice

A firm invests in a new machine that costs $2,000 a year but which is expected to produce an increase in total revenue of $2,200 a year. The current real rate of interest is 8 percent. The firm should:

A) Undertake the investment because the expected rate of return of 12 percent is greater than the real rate of interest
B) Undertake the investment because the expected rate of return of 10 percent is greater than the real rate of interest
C) Undertake the investment because the expected rate of return of 9 percent is greater than the real rate of interest
D) Not undertake the investment because the expected rate of return of 7 percent is less than the real rate of interest