Consider a firm with a contract to sell an asset for $137,000 five years from no

Question

Consider a firm with a contract to sell an asset for $137,000 five years from now. The asset costs $78,400 to produce today. Given a relevant discount rate on this asset of 13 percent per year, calculate the profit (or loss) 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.)

At what rate does the firm just break even? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Consider a firm with a contract to sell an asset for $137,000 five years from now. The asset costs $78,400 to produce today. Given a relevant discount rate on this asset of 13 percent per year, calculate the profit (or loss) 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.)

Explanation / Answer

PV of 137,000 =137000*1/(1.13)^5=74358.11

  Break-even interest rate =11.81%

78400-137000*1/(1+r)^5 =0

78400=137000*1/(1+r)^5

137000/78400=1/(1+r)^5

=(137000/78400)^(1/5)-1=r

r=11.81%

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