A firm is considering a project with an annual cash flow of $200,000. The project would have a seven year life, and the company uses a discount rate of 10%. What is the maximum amount the company could invest in the project and have the project still be acceptable?

Question

Quizplus · Accepted Answer

To calculate the maximum investment the company could make and still have the project be acceptable, we need to find the Present Value of the cash flows over the seven year life of the project. Using a financial calculator, we can find that the present value of the annual cash flow of $200,000 at a discount rate of 10% is $1,266,998. Therefore, the maximum amount the company could invest in the project would be the present value of the cash flows, minus the initial investment, which is $1,266,998 - x = 0. Solving for x, we get $973,600 as the maximum investment the company could make and still have the project be acceptable. Hence, the correct answer is C.

A Firm Is Considering a Project with an Annual Cash