A company is considering a project with an annual cash flow of $400,000. The project would have a seven-year life, and the company uses a discount rate of 10%. What is the maximum amount the company could invest in the project and have the project still be acceptable?

Question

Quizplus · Accepted Answer

The maximum amount the company could invest is the present value of the cash flows. Using the formula for the present value of an annuity, PV = C * [(1 - (1 + r)^-n) / r], where C is the annual cash flow, r is the discount rate, and n is the number of years, the calculation is $400,000 * [(1 - (1 + 0.10)^-7) / 0.10] = $1,947,200.

A Company Is Considering a Project with an Annual Cash