A firm is considering a project with an annual cash flow of $80,000. The project would have a 10-year life, and the company uses a discount rate of 8%. What is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

Question

Quizplus · Accepted Answer

The maximum amount that the company could invest can be calculated using the present value formula:
PV = CF / (1+r)^n
Where PV is the present value, CF is the yearly cash flow, r is the discount rate, and n is the number of years. In this case, PV = 0 (since we want the maximum investment the company can make), CF = 80,000, r = 0.08, and n = 10. Plugging these values into the formula and solving for PV, we get:
0 = 80,000 / (1+0.08)^10
0 = 80,000 / 2.1589
PV = $36,982. Therefore, the maximum amount that the company could invest in the project and still have it be acceptable is $36,982 / 0.08 = $536,800 (rounded). Therefore, the best choice is B.

A Firm Is Considering a Project with an Annual Cash