Freedom Enterprises is considering investing in a project that is expected to produce $12,000 in cash flows each year for five years. If Freedom Enterprises' cost of capital is 14%, what is the
Maximum the firm should be willing to invest in this project? Assume the first cash flow will
Occur one year after the investment is made, and round your answer to the nearest dollar.

Question

Quizplus · Accepted Answer

We can use the formula for present value of an annuity to calculate the maximum investment:
PV = CF * [(1 - (1 / (1 + r)^n)) / r]
where PV is the present value, CF is the cash flow per year, r is the cost of capital, and n is the number of years.
Substituting the given values, we get:
PV = 12000 * [(1 - (1 / (1 + 0.14)^5)) / 0.14] = $41,197 (rounded to the nearest dollar)
Therefore, the maximum investment Freedom Enterprises should be willing to make is $41,197. Choice (B) is the correct answer. To find the maximum investment amount, we need to calculate the present value of the cash flows using the cost of capital of 14%. Using a present value annuity factor table, the present value factor for 5 years at 14% is 3.4330. 
PV = Cash flow x Present value factor
PV = $12,000 x 3.4330
PV = $41,196. Thus, the maximum investment amount should be $41,197 (rounded to the nearest dollar).

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