Abigail's Tax Help, is a firm that sells advice to taxpayers. Abigail is considering buying a new computer that costs $1,500. She expects that the computer will generate an additional profit of $1,200 at the end of the first year and $500 at the end of the second year, after which it will be worthless. If the annual interest rate in the next two years is 5 percent, what is the present value of the profit from the computer?

Question

Quizplus · Accepted Answer

The present value of the profit is calculated by discounting the future profits to the present value using the formula: PV = FV / (1 + r)^n. For the first year: $1,200 / (1.05)^1 = $1,142.86. For the second year: $500 / (1.05)^2 = $453.51. Adding these gives $1,596.37, which rounds to $1,596.

Abigail's Tax Help, Is a Firm That Sells Advice to Taxpayers