Question

General Electric has the opportunity to purchase a new factory today that will provide them with a$50 million return four years from now. If prevailing interest rates are 6 percent, what is the maximum that the project can cost for General Electric to be willing to undertake the project?

a $104.00
b. $120.00
c. $121.67
d. $123.98 .. $ 400.00

Answer 1

General Electric should pay a maximum of approximately $39.58 million for the new factory today to get a return of $50 million after four years, assuming the interest rate is 6%.

Step-by-step explanation:

The question deals with calculating the present value of a future cash flow. Given that General Electric has an opportunity to receive a $50 million return four years from now, and considering the prevailing interest rates are 6%, we want to find out the maximum cost that General Electric should pay today to make the project worthwhile.

The formula to calculate the present value (PV) is:

PV = FV / (1 + r)^n

Where:

• FV is the future value ($50 million).
• r is the interest rate (6% or 0.06).
• n is the number of periods (4 years).

By substituting the given values into the formula, we get:

PV = 50,000,000 / (1 + 0.06)^4

PV = 50,000,000 / (1.262476)

PV = $39,582,019.93

Hence, the maximum cost that General Electric should pay for the factory today considering a 6% discount rate is approximately $39.58 million.