A firm is considering a project with an annual cash flow of £240,000. The project would have an 8-year life, and the company uses a discount rate of 12 per cent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

Question

Quizplus · Accepted Answer

Using the present value formula for an annuity, we get:
PV = (CF / r) x [1 - (1 / (1 + r)^n)]
where CF = £240,000, r = 12%, and n = 8 years
Plugging in these values, we get:
PV = (240,000 / 0.12) x [1 - (1 / 1.12^8)]
PV = £1,717,259.48
Therefore, the maximum amount the company could invest in the project would be the present value of the cash flows, which is £1,717,259.48.

A Firm Is Considering a Project with an Annual Cash