MIcrosoft Corporation is planning to acquire a new machine, which will have a useful life of two years. However, there is a 10% probability that the machine will break down after only one year. There are two states of economy, Boom and Bust, with the probability of occurrence 60% and 40% in any given year. If the economy is Boom, the pre-tax cash flow from the machine is $25,000 annually, and if the economy is bust, the pre-tax cash flow is only $18,750. The proper discount rate is 12%. The tax rate is 20%. 

What is the maximum amount that Fisher should pay for this machine?

Answer rating: 100% (QA)

To determine the maximum amount that Fisher should pay for the machine we need to calculate the expe... View the full answer