A snow plough will generate a net income of R20 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?
A)The present value of the final year's net income is less than R11 000.
B)The owner would sell the snow plough if she received an offer of R13 000 for it.
C)The owner would sell the snow plough if she received an offer of R3 500.
D)The present value of the income of the net income the snow plough will generate over the 8 year period is more than R100 000.

Question

Quizplus · Accepted Answer

If the owner received an offer of R3 500 for the snow plough, she would not sell it because the present value of the net income generated over 8 years is more than R35 000. This is calculated as follows:

PV = R20 000 x (1 - 1/1.1^8)/0.1 = R120 165
Value of plough after 8 years = 0
PV of net income = R120 165

Therefore, statement C is not true. The owner would not sell the snow plough if she received an offer of R3 500 because the present value of the net income generated over 8 years is higher than that.

A Snow Plough Will Generate a Net Income of R20