Consider a machine that lasts two years before it wears out and adds $100 to output in each of these two years.If the rate of return per year is 5%,calculate the initial cost of the machine.

Question

Quizplus · Accepted Answer

Using a present value formula, we can calculate the cost of the machine:
PV = FV/(1+r)^n
where PV is the present value, FV is the future value, r is the rate of return, and n is the number of years.

For this problem, FV is $100 per year for two years, so FV = $200. r is given as 5%, so r = 0.05. n is 2 years, so n = 2.

Plugging in these values, we get:
PV = $200/(1+0.05)^2
PV = $169.40

Therefore the initial cost of the machine is closest to $186, which is answer choice B.

Consider a Machine That Lasts Two Years Before It Wears