Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in two years.What is the highest interest rate at which Dobson would find this project profitable?
A)7%
B)6%
C)5%
D)4%

Question

Quizplus · Accepted Answer

The project is profitable if the present value of the payoff is greater than the initial investment. The present value of $167,000 in two years at 5% interest is $151,200, which is greater than $150,000. At 6%, the present value is $148,305, which is less than $150,000. Therefore, the highest interest rate at which the project is profitable is 5%.

Dobson Construction Has an Investment Project That Would Cost $150,000