Question

Consider a firm with a contract to sell an asset for $154,000 five years from now. The asset costs $90,000 to produce today. Given a relevant discount rate of 13 percent per year, calculate the profit the firm will make on this asset. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Firm's profit(loss) $ At what rate does the firm just break even? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Break-even rate

Answer 1

the firm will have a loss of 6.414,97‬

Break-even rate = 11.34%

Step-by-step explanation:

We calcualte the present value of a lump sum to know the present sale value:

`(Nominal)/((1 + rate)^(time) ) = PV`

Nominal: 154,000

time 5 years

rate 0.13

`(154000)/((1 + 0.13)^(5) ) = PV`

PV 83,585.03

the current sale price 83,585.03

given a cost of (90,000)

the firm will have a loss of 6.414,97‬

To break event the present value should be 90,000:

`(154000)/((1 + r)^(5) ) = 90,000`

`√(5){(154000)/(90,000)} -= (1 + r)`

rate = 0.113411345 = 11.34%