What is the maximum that should be invested in a project at time zero if the inflows are estimated at $40,000 annually for three years, and the cost of capital is 9 percent?
A)$101,251.79
B)$109,200.00
C)$117,871.97
D)$130,800.00

Question

Quizplus · Accepted Answer

To find the maximum that should be invested in a project at time zero given the inflows and the cost of capital, we use the present value formula for an annuity. The present value (PV) of an annuity formula is PV = PMT × [(1 - (1 + r)^-n) / r], where PMT is the annual payment ($40,000), r is the annual interest rate (9% or 0.09), and n is the number of periods (3 years). Plugging these values into the formula gives the maximum that should be invested today to break even on the project, which calculates to approximately $101,251.79.

What Is the Maximum That Should Be Invested in a Project