CapiCal Enterprises is transforming some of their fossil fuel based processes to those being driven by wind turbines. Based on extensive meteorological data, the following savings have been projected for the next five years: $850,000, $680,000, $995,000, $778,000 and $900,000. If interest rates are at 7% compounded annually and the company is willing to invest all the savings in the green technology, what would it be willing to pay today for the reengineering?

Question

Quizplus · Accepted Answer

The present value of a series of cash flows can be calculated using the formula: PV = CF1/(1+r) + CF2/(1+r)^2 + CF3/(1+r)^3 + ... + CFn/(1+r)^n, where PV is the present value, CF is the cash flow in each period, r is the interest rate, and n is the number of periods. Using this formula, we can calculate the present value of the projected savings:
PV = 850,000/(1+0.07)^1 + 680,000/(1+0.07)^2 + 995,000/(1+0.07)^3 + 778,000/(1+0.07)^4 + 900,000/(1+0.07)^5
PV = $3,435,778 (rounded to the nearest dollar)
Therefore, the company should be willing to pay up to $3,435,778 today for the reengineering. The closest answer choice is C.

CapiCal Enterprises Is Transforming Some of Their Fossil Fuel Based