Consider a one-year project that costs $126,000, provides an income of $70,000 a year for 5 years, and costs$225,000 to dispose of at the very end of the fifth year. Assume that the first payment comes at the startof the year after the project is undertaken. Should the project be undertaken at a 0% discount rate

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23 December, 08:19

Consider a one-year project that costs $126,000, provides an income of $70,000 a year for 5 years, and costs$225,000 to dispose of at the very end of the fifth year. Assume that the first payment comes at the startof the year after the project is undertaken. Should the project be undertaken at a 0% discount rate

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Bailee Carrillo · Answer 1

It is not profitable to proceed with the project.

Explanation:

Giving the following information:

Consider a one-year project that costs $126,000; it provides an income of $70,000 a year for 5 years and costs $225,000 to dispose of at the very end of the fifth year.

When the discount rate is 0%, the value of money over time doesn't vary. We need to calculate the present value:

PV = - 126,000 + (70,000*5) - 225,000 = - $1,000

It is not profitable to proceed with the project.