Quicken Iron and Soldering (Quicken), based in Montreal, is considering the purchase of several soldering torches. Each of the 60 industrial torches costs $4,000 and is expected to last six years. While the salesperson advertises net income potential of $1,200 per year per torch, prior experience suggests that 1 out of 15 torches fail at the end of the first year and 2 more out of 15 fail at the end of the second year. The remainder last their advertised lifetime. A warranty is provided for the first year only and Quicken will receive a new torch to replace each torch that fails within one year; the replacements are guaranteed to last the advertised timeframe.
Required:
Should Quicken proceed with the purchase if the expected inflation rate is 2 percent and the real rate of return demanded is 12 percent?