Question

What is the maximum amount a firm should pay for a project that will return $15,000 annually for 5 years if the opportunity cost is 18%?

Answer 1

The firm should pay $46907.57 for the given project.

Step-by-step explanation:

Given information:

Return = $15000 annually

Time = 5 years

Opportunity cost = 18%

The formula for payment is

`PV=R((1)/(OC)-(1)/(OC(1+OC)^t))`

where, R is return, OC is opportunity cost, t is time in years.

Substitute R=15000, t=5 and OC=0.18 in the above formula.

`PV=15000((1)/(0.18)-(1)/(0.18(1+0.18)^5))`

`PV=46907.5653141`

`PV\approx 46907.57`

Therefore the firm should pay $46907.57 for the given project.