Consider a firm with a contract to sell an asset for 150,000 five years from now

Question

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?

Explanation / Answer

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.

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