Question

A security firm is offered $80,000 in one year for providing CCTV coverage of a property. Thecost of providing this coverage to the security firm is $74,000, payable now, and the interestrate is 8.5%. Should the firm take the contract?

Answer 1

Answer:

contract s not acceptable

Explanation:

Given data:

worth of CCTV coverage contract = $ 80,000

Coverage Cost   = $ 74,000

Interest rate = 8.5%

Present value of the CCTV coverage is PV

$PV = \frac{ 80,000}{1.0850} = 73,732.72$

As we can see from above calculation that present value of receivable amount is less than  current cost, hence the contract is not acceptable