Yoyo's Frozen Yogurt,Inc.is thinking of building a new warehouse.They believe that this will given them $50,000 of additional revenue at the end of one year,$60,000 additional revenue at the end of two years,and $70,000 in additional revenue at the end of three years.If the interest rate is 5 percent,Yoyo would be willing to pay
A) $140,000,but not $150,000.
B) $150,000,but not $160,000.
C) $160,000,but not $170,000.
D) $170,000,but not $180,000.

Question

Quizplus · Accepted Answer

We can use the present value formula to determine the most Yoyo would be willing to pay for the warehouse, given the additional revenues it will generate. 
PV = FV/ (1 + i)^n 
PV = $50,000/(1+.05)^1 + $60,000/(1+.05)^2 + $70,000/(1+.05)^3 
PV = $50,000/1.05 + $60,000/1.1025 + $70,000/1.1576 
PV = $47,619.05 + $54,375.66 + $60,338.52 
PV = $162,333.23 
Thus, Yoyo would be willing to pay up to $160,000 for the warehouse, which is the closest option to our calculated present value. Therefore, the answer is C.