Asked by Sydnee Frakes on Apr 28, 2024
Verified
A logging company is considering logging an area for a current cost of $500 per acre to obtain a profit the next year of $600 per acre. The market rate of interest is 10 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) Yes, the present value of the profit is greater than the present value of the cost.
D) No, the present value of the profit is less than the present value of the cost.
Present Value
The present value of a future amount of money or series of cash payments, calculated using a particular return rate.
Market Rate
The prevailing price or interest rate available in the marketplace for goods, services, or securities at any given time.
Interest
The cost of borrowing money, typically expressed as a percentage of the amount borrowed, paid to the lender over a specific period.
- Determine and explain the present and future values as they apply to decisions in economics.
Verified Answer
RJ
Raymart Joseph SindacMay 02, 2024
Final Answer :
C
Explanation :
The present value of the profit ($600) next year, discounted at the market rate of interest (10%), is $600 / (1 + 0.10) = $545.45, which is greater than the current cost of $500 per acre. Therefore, the investment is financially viable.
Learning Objectives
- Determine and explain the present and future values as they apply to decisions in economics.