Final answer:
To determine the maximum amount to spend now on the project at 6% interest, we need to calculate the present value of the future cost savings. The present value for the first five years is $373.89 and for the next five years is $747.79. The maximum amount to spend now on the project is the sum of these present values: $1121.68.
Step-by-step explanation:
To determine the maximum amount to spend now on the project at 6% interest, we need to calculate the present value of the future cost savings. The project has two periods: the first five years and the next five years. The present value formula is PV = CF/(1+r)^n, where PV is the present value, CF is the cash flow, r is the interest rate, and n is the number of periods.
For the first five years, the cash flow is $500 per year, the interest rate is 6%, and the number of periods is 5. Plugging these values into the formula, we get PV = $500/(1+0.06)^5 = $500/1.338225577 = $373.89.
For the next five years, the cash flow is $1,000 per year, the interest rate is 6%, and the number of periods is 5. Plugging these values into the formula, we get PV = $1,000/(1+0.06)^5 = $1,000/1.338225577 = $747.79.
The maximum amount to spend now on the project is the sum of these present values: $373.89 + $747.79 = $1121.68.