Consider a firm with a contract to sell an asset for $135,000 five years from now....
Consider a firm with a contract to sell an asset for $135,000 five years from now. The asset costs $71,000 to produce today. a. Given a relevant discount rate of 12 percent per year, calculate the profit the firm will make on this asset. (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. At what rate does the firm just break even?
Homework Answers
| ans a) | ||||
| computation of profit/Net present value | ||||
| PV of cash inflow = | 135000/(1.12)^5 | |||
| 76602.63 | ||||
| PV of cash outflow = | 71000 | |||
| therefore NPV/Profit = | 5602.63 | |||
| ans b) | we have to use financial calculator to solve this | |||
| put in calculator - | ||||
| FV | 135000 | |||
| PV | -71000 | |||
| PMT | 0 | |||
| N | 5 | |||
| Compute I | 13.71% | |||
| Therefore break even rate = | 13.71% | |||
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