A consultancy calculates that it can supply crude oil assaying services to a small oil producer for $115,000 per year for five years. There are some upfront costs the consultancy will require the oil producer to absorb. What is the maximum that these upfront costs could be, if the equivalent annual annuity to the oil company is to be under $160,000, given that the cost of capital is 9%?

Question

Quizplus · Accepted Answer

B) Annual difference = $160,000 - $115,000 = $45,000;
PV over 5 years at 9% = $175,034

A Consultancy Calculates That It Can Supply Crude Oil Assaying