Homework SourseConsider a firm with a contract to sell an asset for 150000
Consider a firm with a contract to sell an asset for 150,000 five years from now the asset costs $75,000 to produce today. Given a relevant discount rate on this asset of 10 percent per year, will the firm make a profit on this asset? At what rate does the firm just break even?
Consider a firm with a contract to sell an asset for 150,000 five years from now the asset costs $75,000 to produce today. Given a relevant discount rate on this asset of 10 percent per year, will the firm make a profit on this asset? At what rate does the firm just break even?
Solution
Present value of 150000 realizing after 5years discounted at 10%.
PV of inflow =cash flow *PVIF(10%,5)=150000*.62092=93138.
NPV Of decision=93138-75000=18138
B) for the purpose of calculation of rate i.e IRR. NPV SHOULD BE ZERO.
THEN PV of inflow =PV of outflow
150000*PVIF=75000
PVIF =0.50 at five year. At the discount rate of 14.87% NPV will become zero. I have calculated the rate with the help of calculator.
