A firm is considering a project with an annual cash flow of $200,000.The project would have a seven year life,and the company uses a discount rate of 10 percent.What is the maximum amount the company could invest in the project and have the project still be acceptable?

Question

Quizplus · Accepted Answer

We can use the formula for present value of an annuity to calculate the maximum investment amount:

PV = CF x (1 - 1/(1+r)^n) / r

where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of years.

Plugging in the values, we get:

PV = $200,000 x (1 - 1/(1+0.1)^7) / 0.1 
PV = $973,600

Therefore, the maximum investment amount is $973,600. Any amount lower than this would make the project acceptable based on the given criteria.

A Firm Is Considering a Project with an Annual Cash