Question

Beene Distributing is considering a project that will return $150,000 annually at the end of each year for the next six years. If Beene demands an annual return of 7% and pays for the project immediately, how much is it willing to pay for the project?

Answer 1

To find out how much Beene Distributing should pay for the project, the present value of the annual $150,000 cash flows is calculated using the present value of the annuity formula, factoring in the desired 7% annual return over six years.

Step-by-step explanation:

To calculate how much Beene Distributing is willing to pay for a project with annual returns of $150,000 for the next six years at a 7% annual return rate, we need to determine the present value of these cash flows. Each cash flow needs to be discounted by the firm's required rate of return, which, in business, is often called the discount rate or cost of capital.

The present value (PV) of an annuity can be calculated using the formula:

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

Where:

• C = Cash flow per period ($150,000 in this case)
• r = Annual interest rate (0.07)
• n = Number of periods (6 years)

Substituting the values into the formula:

PV = $150,000 * [(1 - (1 + 0.07)^(-6)) / 0.07]

After calculating this, the present value will represent the maximum price Beene Distributing would be willing to pay for the project today to achieve at least a 7% return.