Question

This project can be undertaken at any time from now. The discount rate is 10%. The...

This project can be undertaken at any time from now. The discount rate is 10%. The present values of the revenues and the costs at each year are given below. What is the optimal investment time?

Year

0

1

2

3

Cost

$20.00

$18.00

$15.00

$14.50

Revenues

$25.00

$25.00

$25.00

$25.00

A)        Now

B)        Year 1

C)        Year 2

D)        Year 3

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Answer #1
Answer:
The year of which the present value of profit will be higher should be opted for the investment:
(a) (b) c =(a-b) d c x d
Year Revenue Cost Profit Present value factor @10% Present value
0 25 20 5 1.0000 5.00
1 25 18 7 0.9091 6.36
2 25 15 10 0.8264 8.26
3 25 14.5 10.5 0.7513 7.89
As, it can be seen from the above calculation that the present value of profit in case of year 2 is higher,
it is the optimal investment time.
Answer is C) Year 2
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