A . Phil is considering selling his dairy. If his dairy generates an annual income of $50,00 . and if the rate of interest is 5 percent, what is the present value of his dairy? b. If the interest rate rises to 7 percent, would he raise or lower his asking price? Explain
a . The present value of Phil's dairy is equal to $50,000/0.05 = $1,000,000.
b. By raising the denominator of the present value equation, an increase in the interest rate will lower the
present value of his dairy. The new present value of the dairy is $50,000/0.07 = $714,285.71 . Phil will have to lower his asking price.
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