Question

question content areaa firm is considering a project with an annual cash flow of $100,000. the project would have an 8-year life, and the company uses a discount rate of 5%. what is the maximum amount the company could invest in the project and have the project still be acceptable?

Answer 1

The maximum amount the company could invest in the project to remain acceptable is the present value of the cash flows, which is $646,320 when discounted at a rate of 5% over the 8-year project life span.

Step-by-step explanation:

To determine the maximum amount a company could invest in a project and still have the project be acceptable, we need to calculate the present value of the project’s cash flows using the provided discount rate of 5%. The project has an annual cash flow of $100,000 for 8 years. Using the formula for the present value of an annuity, we calculate:

PV = C * [(1 - (1 + r)^-n) / r]

Where:

• C = annual cash flow of $100,000
• r = discount rate of 5% or 0.05
• n = project life of 8 years

Applying these values:

PV = $100,000 * [(1 - (1 + 0.05)^-8) / 0.05]
PV = $100,000 * [1 - 0.67556] / 0.05
PV = $100,000 * 6.4632
PV = $646,320

This is the maximum amount the company could invest in the project and remain acceptable, as it represents the total present value of the cash flows over the project's life span at the discount rate of 5%.