Tom's Donuts can invest in a new espresso machine that costs $300 and will yield expected profits of $200 each year for two years. What is the present discounted value of the expected profits from this investment if the interest rate is 5%?

Question

Quizplus · Accepted Answer

The present discounted value (PDV) is calculated using the formula: PDV = Profit / (1 + r)^t. For year 1, PDV = $200 / (1 + 0.05)^1 = $190.48. For year 2, PDV = $200 / (1 + 0.05)^2 = $181.41. Adding these gives a total PDV of $371.89.

Tom's Donuts Can Invest in a New Espresso Machine That