A snow plough will generate a net income of €2,000 per year for its owner. After 8 years, the plough will be worn out and have zero value. The owner has worked out the present value of the net income the snow plough will generate using an interest rate of 10%. Which of the following statements is NOT true?

Question

Quizplus · Accepted Answer

The owner would not sell the snow plough if she received an offer of €3,500 because the present value of the net income generated over 8 years is higher than that amount. The present value of the final year's net income being less than €1,100 is possible due to the time value of money and discounting at a 10% interest rate. The owner would sell the snow plough if she received an offer of €13,000 as it is higher than the present value of the net income generated over 8 years. The present value of the net income the snow plough will generate over the 8 year period is more than €10,000, making this statement true.

A Snow Plough Will Generate a Net Income of €2,000