Question
A company has one investment asset and no debt.The asset was acquired at t=0 for its fair value of $927.30.The asset has a two year
A company has one investment asset and no debt.The asset was acquired at t=0 for its fair value of $927.30.The asset has a two year life and two cash flows are possible each year. State 1 has a cash flow of $250 with a probability of 40% and state 2 has a cash flow of $700 with a probability of 60%. States are independent across years. The appropriate interest rate to use in this analysis is 8% per year.The company's balance sheet at t=0 is as follows:
Investment asset (at fair value)$927.30
Net worth$927.30
If the company uses straight-line depreciation and state 1 is realized in year 1, what the expected net income for state 1 in year 2?
A-250 - 927.30 / 2
B-250 x 0.08 + 0.40 x 250 - 927.30 / 2
C-250 x 0.08 + 250 - 927.30 / 2
D-[(0.40 x 250) + (0.60 x 700)] - 927.30 / 2.
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