Objective Products' required rate of return on capital budgeting projects is 9%.The company is considering an investment that would yield net annual operating cash flows of $30,000 for 3 years.What is the maximum amount that the company will be willing to invest in this project?

Question

Quizplus · Accepted Answer

The maximum amount the company will be willing to invest is the present value of the future cash flows at the required rate of return. Using the formula for the present value of an annuity: PV = C * [(1 - (1 + r)^-n) / r], where C = annual cash flow ($30,000), r = annual rate of return (9% or 0.09), and n = number of years (3), we find PV = $30,000 * [(1 - (1 + 0.09)^-3) / 0.09] ≈ $75,939.

Objective Products' Required Rate of Return on Capital Budgeting Projects