Question

Your brother has been offered a project paying a $725 annuity due for the next 15 years. What is the maximum amount of money your brother should invest in this project if he has a 12.45 percent rate of return on the investment?

a. $124.73
b. $4,821.50
c. $2,985.03
d. $5,421.78

Answer 1

d. $5,421.78

Step-by-step explanation:

We need to calculate the Net Present Value using the Internal Rate of Return given on this project. This would give us the maximum amount of money your brother should invest in this project. By doing this, we get the Initial cost that equals the present value of the annual cashflows and this is the maximum that can be invested.

Using a Financial Calculator, the Net Present Value will be calculated as follows :

Use the CFj function

$725 CFj

Nj 15 (for number of years)

i 12.45 %

Shift NPV = $5,421.78

Therefore, the maximum amount of money your brother should invest in this project is $5,421.78.