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?

Question

Quizplus · Accepted Answer

The present value of the profit ($600) discounted at the market rate of interest (10%) for one year is $545.45 ($600 / (1 + 0.10)), which is greater than the current cost of $500 per acre. Therefore, the investment is financially viable.

A Logging Company Is Considering Logging an Area for a Current