Acme Co. has excess cash that it wants to invest. Acme is considering purchasing an asset that is expected to return $25,000 per year after tax for the next 5 years, with an after-tax disposal value of $10,000. Acme's required rate of return on this investment is 8%.
What is the maximum amount that Ames would be willing to pay to purchase this asset? (Use the appropriate discount factor from Appendix A and round your final answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

PV of payments: Annuity × Discount factor (5 periods, 8%) = $25,000 × 3.99271 = $99,817.75
PV of disposal value: Future value × Discount factor (5 periods, 8%) = $10,000 × 0.68058 = $6,805.80
Total maximum amount: $99,817.75 + $6,805.80 = $106,624 (rounded)

Acme Co Has Excess Cash That It Wants to Invest