Question

A project with an initial investment of $446,900 will generate equal annual cash flows over its 8-year life. The project has a required return of 8.7 percent. What is the minimum annual cash flow required to accept the project?

A. $91,251.78
B. $76,884.10
C. $87,902.91
D. $74,321.30
E. $79,845.31

Answer 1

The minimum annual cash flow required to accept the project is $91,251.78.

Step-by-step explanation:

To find the minimum annual cash flow required to accept the project, we need to calculate the present value of the cash flows and compare it to the initial investment. Since the cash flows are equal each year, we can use the formula for the present value of an annuity:

Present Value = Cash Flow / (1 + r)^(n-1) + Cash Flow / (1 + r)^(n-2) + ... + Cash Flow / (1 + r) + Cash Flow

Plugging in the given values into the formula, we get:

Present Value = C / (1 + 0.087)^(8-1) + C / (1 + 0.087)^(8-2) + ... + C / (1 + 0.087) + C = 446,900

Simplifying the equation and solving for C, we find that the minimum annual cash flow required to accept the project is $91,251.78.