Question

Consider a firm with a contract to sell an asset for $155,000 four years from now. The asset costs $96,000 to produce today. a. Given a relevant discount rate on this asset of 14 percent per year, calculate the profit (or loss) the firm will make on this asset. (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. At what rate does the firm just break even? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:-

a.) The profit (or loss) of the firm on asset is calculated by:-

Profit (or loss) = Present value of selling price of an asset - Cost price of an asset

STEP 1

Fist, we want to calculate the present value. The formula for calulating present value is given by:-

Present value (PV) =

where, FV is the future value

r is the discount rate

n is year

The following informations are given in the question:-

FV = $ 155,000

r = 0.14

n = 4

Present value (PV) = $ 155,000 / (1+ 0.14) ^4

= $ 91,772.44

STEP 2

Profit (or loss) = Present value of selling price of an asset - Cost price of an asset

Here, Present value = $ 91,772.44

Cost price = $96,000

Profit (or loss) = $ 91,772.44 - $ 96,000

= - $ 4,227.56

The loss firm will make on this asset is - $ 4227.56

b.) We want to find the break even rate of the firm. Here, Break-even rate or interest rate is calculated using Excel.

The following informations are given in the question:-

n = 4

PV = $96,000

FV= $ 155,000

PMT = 0

In excel, Break-even rate can be caluculated by:-

= RATE(nper,pmt,pv,fv) ( here, PV is denoted as negative sign)

= RATE( 4,0,-96000,155000)

Break-even rate = 12.72%

Hence. the firms break-even rate is 12.72%