Consider a firm with a contract to sell an asset for $138,000 five years from now. the asset costs $74,000 to produce today. given a relevant discount rate on this asset of 12 percent per year, calculate the profit the firm will make on this asset.

Question

Jamar Velazquez

Business

20 February, 01:57

Consider a firm with a contract to sell an asset for $138,000 five years from now. the asset costs $74,000 to produce today. given a relevant discount rate on this asset of 12 percent per year, calculate the profit the firm will make on this asset.

+4

Answers (1)

Know the Answer?

Mercle · Answer 1

The cost to produce today = 74000

At a discount of 12%, the future value of costs in 5 years = PV * (1+r) ^n where PV = 74000, r = 12% = 0.12 and n = 5 years = 5

The value of costs in 5 years = 74000 * (1+0.12) ^5

The value of costs in 5 years = 74000*1.12^5

The value of costs in 5 years 130,413.28

Price in 5 years = 138,000

Profit = 138,000-130,413.28 = 7,586.72

The profit the firm will make on this asset (considering time value of money) = $7,586.72