A car rental company will earn a net income of $6,000 per year on a new car for the first three years of its life.After three years,the car will be worthless.If the interest rate is 10 percent (0.10)per ear,what is the present value of the car to the car rental company? (Assume that each year's income is received at the end of the year. )

Question

Quizplus · Accepted Answer

To find the present value of the car, we need to calculate the present value of the net income generated by the car over its first three years of life.

Using the formula for the present value of an annuity, we have:

PV = C * ((1 - (1 + r)^-n) / r)

Where PV is the present value, C is the annual cash flow, r is the interest rate, and n is the number of years.

In this problem, C = $6,000, r = 0.10, and n = 3.

PV = $6,000 * ((1 - (1 + 0.10)^-3) / 0.10) = $14,921.11

Therefore, the present value of the car to the car rental company is $14,921.11.

Choice B is the correct answer.

A Car Rental Company Will Earn a Net Income of $6,000