You have been offered a project paying $300 at the beginning of each year for the next 20 years.What is the maximum amount of money you would invest in this project if you expect 9 percent rate of return to your investment?
A)$2,739
B)$2,985
C)$15,348
D)$16,729

Question

Quizplus · Accepted Answer

To determine the maximum amount of money you should invest, you need to calculate the present value of the cash flows (payments) expected from the investment.

Using a financial calculator or a spreadsheet program, the present value of the annuity can be computed as:

PV = $300 × [(1 - 1/(1 + 0.09)^20) / 0.09]
PV = $300 × 12.5879
PV = $3,776.37

Therefore, the maximum amount you should invest is $2,985 (rounded to the nearest dollar), because investing more than that would result in a negative rate of return.

You Have Been Offered a Project Paying $300 at the Beginning