Question

Rosa's Designer Gowns creates exquisite gowns for special occasions on a prepaid basis only. Rosa's required return is 7%, and she has been offered $160,000 today in exchange for delivering the gown in one year.
Should Rosa sell this gown if it will cost her $180,000 to produce the gown in one year? Show work please.

Answer 1

Answer:

No she should not sell this gown and should not accept the offer.

Explanation:

To assess whether she should sell the gown or not, we need to calculate the one year future value of the payment she is getting today for the gown.

The future value of $160000 after one year will be:

Future value = Present value ( 1 + r )

Where r is the required rate or interest rate.

Future value = 160000 ( 1 + 0.07)  = $171200

The cost to Rosa will have a value of $180000 in one year.

There is a loss to Rosa of $8800 on this sale.

Loss = 171200 - 180000 = $8800