LAX Inc., a transportation company, is debating accepting a new contract. The contract would result in profits
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Question:
LAX Inc., a transportation company, is debating accepting a new contract. The contract would result in profits of $5,000 per year for the first 3 years and $8,000 for the final two years. The startup costs for the project would be $20,000, and it would be worthless after the five years of operations.
a. If the market interest rate is 8%, should LAX Inc. accept the contract? Why?
b. What interest rate would make the firm indifferent to taking the contract?
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