Asked by Justin Berry on Jun 25, 2024
Verified
An electricity company is considering damming a small river to generate electricity at a cost of $250,000 and a profit of $300,000 in 5 years. The current market rate of interest is 3 percent. Should the company make the investment?
A) Yes, the future value of the profit is greater than the present value of the cost.
B) No, the future value of the profit is less than the present value of the cost.
C) No, the present value of the profit is less than the present value of the cost.
D) Yes, the present value of the profit is greater than the present value of the cost.
Present Value
Present value is the current worth of a future sum of money or stream of cash flows, given a specified rate of return.
Future Value
The amount to which some current amount of money will grow if interest earned on the amount is left to compound over time.
Market Rate
The prevailing interest rate available in the marketplace, often influenced by factors like central bank rates, inflation, and the demand for and supply of credit.
- Gain knowledge on the time value of money concepts and their application in investment decisions.
Verified Answer
MG
Mathieu GrindlayJul 02, 2024
Final Answer :
D
Explanation :
The present value of the profit ($300,000 in 5 years) discounted at a 3% interest rate is greater than the immediate cost of $250,000, making the investment financially viable.
Learning Objectives
- Gain knowledge on the time value of money concepts and their application in investment decisions.