Question

Suppose, r= 0.10. Should General Motors spend $150 million to build a factory that will yield $300 million in 15 years? (5 points) 3.

Answer 1

Principal amount = $150 million

Rate of interest = 10%

Final amount = $300 million

Time = 15 years

To calculate the future value of $150 million, the following formula can be used:

F.V. = P(1 + r)ⁿ

Where

F.V. stands for future value,

P is the principal amount,

r is the rate of interest and

n denotes the number of periods.

Putting the values:

F.V. = 150(1 + 0.1)¹⁵

F.V. = 150(1.1)¹⁵

F.V. = 150(4.1772)

F.V. = 626.5872 (approximately)

The future value of $150 million after 15 years at 10% rate of interest is $626.59 (approximately).

Since the future value of $150 million after 15 years is more than $300 million, the company should not spend $150 million to build a factory that will yield $300 million in 15 years at 10% rate of interest.