A firm is considering a project with annual cash flows of £40,000. The project would have a 10-year life, and the company uses a discount rate of 8 per cent. What is the maximum amount the company could invest in the project and the project still be acceptable?

Question

Quizplus · Accepted Answer

To calculate the maximum investment amount, we use the present value formula: PV = CF/(1+r)^t, where CF = cash flow, r = discount rate, and t = time. Plugging in the given values, we get PV = £40,000/(1+0.08)^1 + £40,000/(1+0.08)^2 + ... + £40,000/(1+0.08)^10 = £268,400. Therefore, the maximum amount the company could invest in the project and still be acceptable is £268,400.

A Firm Is Considering a Project with Annual Cash Flows