A local government awards a landscaping company a contract worth $1.2 million per year for five years for maintaining public parks.The landscaping company will need to buy some new machinery before they can take on the contract.If the cost of capital is 7%,what is the most that this equipment could cost if the contract is to be worthwhile for the landscaping company?

Question

Quizplus · Accepted Answer

To find the maximum cost of the machinery, we need to use the present value formula:
PV = FV / (1 + r)^n 
where PV is the present value, FV is the future value, r is the cost of capital, and n is the number of years.

In this case, the present value of the contract over five years is:
PV = $1.2 million x 5 / (1 + 0.07)^5 = $4.92 million

Therefore, the most the equipment could cost and still make the contract worthwhile is $4.92 million. Choice C is the correct answer.

A Local Government Awards a Landscaping Company a Contract Worth