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Question - The baltic company is considering the purchase of a new machine tool to replace an obsolete one. The machine being used for the operation has a tax book value of $80,000 with an annual depreciation expense of 8,000. it has a salvage value (resale value )of 40,000, is in good working order, and will last at least 10 more years. The proposed machine will perform the operation so much more efficiently that baltic engineers estimate that labor, material, and other direct costs of the operation will be reduced 60,000 a year if it is installed. The proposed machine costs 240,000 delivered and installed, and it's economic life is estimated at 10 years, with zero salvage value. The company expects to earn 14% on it's investment after taxes(14% is the firm's cost of capital). The tax rate is 40% and the firm uses straighline depreciation. Any gain or loss on the machine is subject to tax at 40 percent.
Should baltic buy the new machine?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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