You are considering an investment that costs $2,000. It is expected to have a usefule life of three years. You are very confidnt about the revinues during the first two years ($1,000 in Year 1 and $1,200 in Year 2), but you are very unsure about the revenue in year 3. If you hope to make at least 10% rate of return in your investment, what is the minimun revenue in year 3 that would make this possible?

Question

Business

Sidney Gilmore

11 August, 11:57

You are considering an investment that costs $2,000. It is expected to have a usefule life of three years. You are very confidnt about the revinues during the first two years ($1,000 in Year 1 and $1,200 in Year 2), but you are very unsure about the revenue in year 3. If you hope to make at least 10% rate of return in your investment, what is the minimun revenue in year 3 that would make this possible?

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Answers (1)

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Gidget · Answer 1

The minimum revenue in year 3 should be: $132.

Explanation:

Denote X is the cashflow in year 3.

We have net present value of the project, to achieve 10% required rate of return should be:

- Initial investment + Present value of Year 1 Cashflow + Present value of Year 2 Cashflow + Present value of year 3 cash flow = - 2,000 + 1,000/1.1 + 1,200/1.1^2 + X/1.1^3 = 0 X/1.1^3 = 99.174 X = $132.

So, to achieve at least 10% required rate of return, the revenue in year 3 should be at least $132.

Thus, the answer is $132.