Question

1.27 During a recession, the price of goods and services goes down because of low demand. A company that makes Ethernet adapters is planning to expand its production facility at a cost of $1,000,000 one year from now. However, a contractor who needs work has offered to do the job for $790,000 if the company will do the expansion now instead of 1 year from now. If the interest rate is 15% per year. how much of a discount is the company getting?

Answer 1

The company that makes Ethernet adapters is planning to
expand the company's production facility at a cost of $1000000 a year from now.
Find the present value of $1000000 a year from now.
Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is 15% and t is the time period
Present value = 1000000/((1.15)^1)
The present value is $869565.2.
However, the contractor is willing to do the work for $790000 as of now.
The discount that the company is getting is ($869565.2 - 790000)
The discount that the company is getting is equal to $79565.22.