The above table shows the future operating profits from an investment. The future operating profits are earned at the end of e the respective years.
-Refer to the table above. If the discount rate is 5 percent and the cost of the investment is $43,000, which of the following is true regarding a profit- maximizing manager?
A)The manager should not make the investment because the net present value is negative.
B)The manager should make the investment because the net present value is positive.
C)The manager should make the investment because the net present value is negative.
D)The manager should not make the investment because the net present value is positive.

Question

The above table shows the future operating profits from an investment. The future operating profits are earned at the end of e the respective years.
-Refer to the table above. If the discount rate is 5 percent and the cost of the investment is $43,000, which of the following is true regarding a profit- maximizing manager?
A)The manager should not make the investment because the net present value is negative. 
B)The manager should make the investment because the net present value is positive. 
C)The manager should make the investment because the net present value is negative. 
D)The manager should not make the investment because the net present value is positive.

Quizplus · Accepted Answer

To find the net present value (NPV), we need to discount the future operating profits by the given discount rate and then subtract the cost of the investment. The calculations are as follows:
Year 1: $15,000 / (1 + 0.05)^1 = $14,285.71
Year 2: $18,000 / (1 + 0.05)^2 = $16,393.44
Year 3: $21,000 / (1 + 0.05)^3 = $18,798.11
Year 4: $24,000 / (1 + 0.05)^4 = $21,430.16
NPV = ($14,285.71 + $16,393.44 + $18,798.11 + $21,430.16) - $43,000 = $7,907.42
Since the NPV is positive, the manager should make the investment to maximize profits. Therefore, the correct answer is B.

The Above Table Shows the Future Operating Profits from an Investment