Bluebird Inc. requires all capital investments to generate an internal rate of return of 14%. Bluebird is currently considering an investment that is expected to generate annual cash inflows of $12,000 for 5 years. The cost of the investment should not exceed:

Question

Quizplus · Accepted Answer

To calculate the cost of the investment, we need to use the formula for the present value of an annuity:

PV = C x [1 - (1 + r)^(-n)] / r

Where:
PV = Present value of the annuity
C = Cash inflows per period
r = Discount rate or required rate of return
n = Number of periods

In this case, C = $12,000, r = 14%, and n = 5.

Using a financial calculator or spreadsheet, we can solve for PV:

PV = $12,000 x [1 - (1 + 0.14)^(-5)] / 0.14 
PV = $41,197 (rounded to the nearest dollar)

Therefore, the cost of the investment should not exceed $41,197 to meet Bluebird's internal rate of return requirement.

Choices A, C, and D are incorrect because they are either too high or too low compared to the calculated cost of the investment.