A firm is considering a project with an annual cash flow of £200,000. The project would have a 7-year life, and the company uses a discount rate of 10 per cent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable?

Question

Quizplus · Accepted Answer

To calculate the maximum amount the company can invest, we need to calculate the present value of the cash flows using the discount rate of 10% and the formula:
Present Value = Cash Flow / (1 + Discount Rate) ^ Number of Years
Using this formula, we can calculate the present value of the cash flows as follows:
PV = 200,000 / (1 + 0.1) + 200,000 / (1 + 0.1) ^ 2 + ... + 200,000 / (1 + 0.1) ^ 7
PV = 200,000 / 1.1 + 200,000 / 1.21 + ... + 200,000 / 1.9672
PV = £973,600
Therefore, the maximum amount the company could invest in the project and still have the project be acceptable is £973,600. Therefore, the answer is (C).

A Firm Is Considering a Project with an Annual Cash