Peanut Co.is planning on investing in a new 2-year project, Project Jelly.Project Jelly is expected to produce cash flows of $100,000 and $120,000 in each of the 2 years, respectively.Peanut requires an internal rate of return of 15%.What is the maximum amount that Peanut should invest immediately in Project Jelly? $\begin{array}{c}

\begin{array}{lll}
\underline{\text { Present Value of } 1}&
\
\underline{\text { Period }}&\underline{15 \%}\
1&.870\
2&.758
\end{array}
\begin{array}{lll}
\underline{\text { Future Value of } 1}\
\underline{\text { Period }}&\underline{15 \%}\
1&1.150\
2&1.323
\end{array}
\end{array}$

Question

Peanut Co.is planning on investing in a new 2-year project, Project Jelly.Project Jelly is expected to produce cash flows of $100,000 and $120,000 in each of the 2 years, respectively.Peanut requires an internal rate of return of 15%.What is the maximum amount that Peanut should invest immediately in Project Jelly? $\begin{array}{c}

\begin{array}{lll}
\underline{\text { Present Value of  } 1}&
\
\underline{\text { Period }}&\underline{15 \%}\
1&.870\
2&.758
\end{array}
\begin{array}{lll}
\underline{\text { Future Value  of } 1}\
\underline{\text { Period }}&\underline{15 \%}\
1&1.150\
2&1.323
\end{array}
\end{array}$

Quizplus · Accepted Answer

To calculate the maximum amount Peanut should invest, we need to find the present value of the cash flows and make sure it equals the amount Peanut is willing to invest. Using a financial calculator, we can solve for the present value using the cash flows and the required internal rate of return:

CF0 = -$x (initial investment, what we are solving for)
CF1 = $100,000
CF2 = $120,000
I/Y = 15
N = 2

Solving for CF0, we get -$177,720. This means that Peanut should invest no more than $177,720 initially in Project Jelly to receive the expected cash flows and meet the required internal rate of return. Therefore, the best choice is B.

Peanut CoIs Planning on Investing in a New 2-Year Project, Project