A local council 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

The present value of the contract's cash flows must be calculated using the formula for the present value of an annuity. The present value of $1.2 million per year for five years at a 7% discount rate is approximately $4.92 million. This is the maximum amount the company should spend on equipment to ensure the contract is worthwhile.

A Local Council Awards a Landscaping Company a Contract Worth