Question

Consider a firm with a contract to sell an asset for $150,000 five years from now. The asset costs $75,000 to produce today. Given a relevant discount rate on this asset of 10 percent per year, will the firm make a profit on this asset? (3 points )At what rate does the firm just break even? (3 points)

I have 150,000/1(1+.10) ^ 5
= 150,000 /1.10 ^ 5
= 150,000/ 1.61051
= 93138.20 - 75,000 = $18,138.20 profit. Is this correct?

I also need help with the break even point.

Answer 1

Yes the solution is correct.
Present value of sale price of asset sold= 150000/1.10^5
Present value of sale price of asset sold= $93138.20
Cost price= $75000
Profit= sales price- cost= 93138.20-75000= $18138.20
Calculation of break even point:
Present value of asset when discount rate is 15%= 150000/1.15^5
Present value of asset when discount rate is 15%= $74576.51
Profit when discount rate is 15%=74576.51-75000= -$423.49
IRR(Break even point)=	Lower rate+	(Lower rate NPV)	*(Higher rate- lower rate)
		(lowe rate NPV- Higher rate NPV)
	10%+	18138.2	*(15%-10%)
		(18138.20+423.49)
	10%+4.89%
So rate at which firm will be break even is 14.89%