Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?a. 7%

b. 6%

c.5%

d. 4%

Dobson will be profitable at an interest rate ≤ 4% hence the closest answer is  ( D )  Note : the investment can be profitable when the (Pv) is greater than the cost of investment

Explanation:

cost of investment project = $150000

yield time = 3 years

yield value = $167000

at what interest rate will this be profitable for Dobson construction APPLYING this equation

Pv = fv * ( 1 + i ) ^ (-n)

fv = project yield

i = interest rate

n = time ( number of years ) = 3

Pv = present value

considering all given interest rates

for i = 7% = 0.07

Pv = 167000 * ( 1.07 )^( - 3 )

Pv = 167000 * 0.8163 = $136322

for i = 6% = 0.06

Pv = 167000 * ( 1.06 )^(-3)

Pv = 167000 * 0.8396 = $140213

for i = 5% = 0.05

Pv = 167000 * (1.05)^(-3)

Pv = 167000 * 0.8638 = $144254

for i = 4% = 0.04

Pv = 167000 * (1.04)^(-3)

Pv = 167000 * 0.8890 = $148463

Note : the investment can be profitable when the (Pv) is greater than the cost of investment

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