Question

A firm is considering an investment into a new technology that would lower costs and increase their profits over the foreseeable future. The technology costs $1 million today and will increase profits by $100 thousand per year. What is the minimum annual discount factor in which the firm is willing to make the investment?

a. 0.95
b. 0.8
c. 0.9
d. 0.7

Answer 1

Answer: C. 0.9

Step-by-step explanation:

From the question, we are given the information that the firm is investing $1 million and it's increasing profit by $100 thousand for every year, the return gotten will be:

= (100000/1000000 × 100)

= 0.1 × 100

= 10%

The discounting factor will be:

= 1 / (1 + interest rate)

= 1 / (1 + 0.1)

= 1 / 1.1

= 0.9

Therefore, the minimum annual discount factor in which the firm is willing to make the investment is 0.90.