A snowplow will generate a net income of $2,000 per year for its owner.After 8 years,the plow will break down and have zero value.The maximum amount of money anyone would pay for the plow is

Question

Quizplus · Accepted Answer

The snowplow generates a net income of $2,000 per year for 8 years, so the total net income is:
$2,000/year x 8 years = $16,000

This means that the maximum amount someone would pay for the plow is equal to the present value of the future income stream, using an appropriate discount rate. Assuming a discount rate of 10%, for example, the present value of the income stream would be:

PV = $2,000/(1+0.1)^1 + $2,000/(1+0.1)^2 + ... + $2,000/(1+0.1)^8
PV = $2,000/1.1 + $2,000/1.21 + ... + $2,000/2.158
PV = $14,482.60

Therefore, the maximum someone would pay for the snowplow is between $2,000 and $14,482.60, which corresponds to choice C.

A Snowplow Will Generate a Net Income of $2,000 Per