Paolo currently has $100,000 invested in bonds that earn him 10 percent interest per year. He wants to open a pizza restaurant and is considering either selling the bonds and using the $100,000 to start his restaurant or borrowing the $100,000 from a bank, which would charge him an annual interest rate of 7 percent. He finally decides to sell the bonds and not take out the bank loan. He reasons, "Because I already have the $100,000 invested in the bonds, I don't have to pay anything to use the money. If I take out the bank loan, I have to pay interest, so my costs of producing pizza will be higher if I take out the loan than if I sell the bonds." What do you think of Paolo's reasoning?

The gilbert instrument corporation is considering replacing the wood steamer it currently uses to shape guitar sides. the steamer has 6 years of remaining life. if kept, the steamer will have depreciaiton expenses of $650 for five years and $325 for the sixthyear. its current book value is $3,575, and it can be sold on an internet auction site for$4,150 at this time. if the old steamer is not replaced, it can be sold for $800 at the endof its useful life. gilbert is considering purchasing the side steamer 3000, a higher-end steamer, whichcosts $12,000 and has an estimated useful life of 6 years with an estimated salvage value of$1,500. this steamer falls into the macrs 5-year class, so the applicable depreciationrates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. the new steamer is fasterand allows for an output expansion, so sales would rise by $2,000 per year; the newmachine's much greater efficiency would reduce operating expenses by $1,900 per year. to support the greater sales, the new machine would require that inventories increase by$2,900, but accounts payable would simultaneously increase by $700. gilbert's marginalfederal-plus-state tax rate is 40%, and its wacc is 15%.a. should it replace the old steamer? b. npv of replace = $2,083.51