Maude Company's required rate of return on capital budgeting projects is 9%.The company is considering an investment that would yield a cash flow of $12,000 per year for five years.Ignoring taxes, what is the most that the company will be willing to invest in this project?

Question

Quizplus · Accepted Answer

The most Maude 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 = PMT × [(1 - (1 + r)^-n) / r], where PMT = $12,000, r = 9% or 0.09, and n = 5 years, the calculation yields approximately $46,676.

Maude Company's Required Rate of Return on Capital Budgeting Projects