Question

A publisher is deciding whether or not to invest in a new printer. The printer would cost $900, and would increase the cash flows in year 1 by $500 and in year 3 by $800. Cash flows do not change in year 2. If the interest rate is 12% ​If the interest rate is 25%, but cash flows change such that the investment renders a cash flow of $500 in year 1 and $800 in year 2 instead of year 3, would the investment take place?

Answer 1

If the interest rate is 12% and the cash flow in year 1 is 500 and 800 in year 3 we will discount these 2 payments buy 12% and if the present value of these 2 payments is more than 900 than the investment is worthy

500/1.12=446.42+

800/1.12^3= 569.42

==1015.85

The present values of the cash flow (1015.85) are more than the initial investment (900) therefore the publisher should invest.

If the interest rate is 25% and the cash flows are 500 in year 1 and 800 in year 2 we need to discount these by 25% and see if the present value of the cash flows are more or less than 900 which is the initial investment.

500/1.25=400+

800/1.25^=512

=912

912 is the present value of cash flows which is more than the initial investment of 900 therefore the investment would have taken place.

Step-by-step explanation: