Always Rite Corporation is considering a project with annual after-tax cash flows of $8000 per year for 5 years. The company's cost of capital is 5%. Using the net present value method, what is the maximum amount that the company should invest?

Question

Quizplus · Accepted Answer

To calculate the maximum amount that the company should invest, we need to find the net present value (NPV) of the project. Using the formula:

NPV = (CF1 / (1 + r)^1) + (CF2 / (1 + r)^2) + ... + (CFn / (1 + r)^n)

where CF is the after-tax cash flow and r is the cost of capital.

For this project, the NPV can be calculated as:

NPV = (8000 / (1 + 0.05)^1) + (8000 / (1 + 0.05)^2) + (8000 / (1 + 0.05)^3) + (8000 / (1 + 0.05)^4) + (8000 / (1 + 0.05)^5) - C

where C is the initial investment.

If we solve for C, the maximum amount that the company should invest is:

C = 8000 / (1 + 0.05)^1 + 8000 / (1 + 0.05)^2 + 8000 / (1 + 0.05)^3 + 8000 / (1 + 0.05)^4 + 8000 / (1 + 0.05)^5
C = $34,636.40

Therefore, the best choice is C as it represents the maximum amount the company should invest to achieve a positive NPV.

Always Rite Corporation Is Considering a Project with Annual After-Tax