​Suppose a Company Is Considering the Construction of a New

question 298

Multiple Choice

​Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?

• A)The company should not construct the new facility because the future value of the construction cost is only $1,628,894.63.
• B)​The company should not construct the new facility because the future value of the construction cost is $1,783,267.42.
• C)​The company should construct the new facility because the present value of the future payoff is $1,092,734.95.
• D)​The company should construct the new facility because the present value of the future payoff is $1,043,652.53.

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Definitions:

Imperfect Competitor

A firm or entity that has the ability to influence the price of the goods or services it sells, due to the lack of perfect competition in the market.

Wage Rate

The fixed amount of compensation or payment given to an employee by an employer in exchange for work performed, typically expressed on an hourly, daily, or piecework basis.

Workers

Individuals engaged in any form of employment or activity to earn income through the provision of labor or services.

Substitution Effect

The economic principle stating that as the price of a good or service rises, individuals will replace more expensive items with less costly alternatives.