Question:
MC algo 5-28 Calculating NPV A project that will last for 8 years is expected to have equal annual cash flows of $97,900. If the required return is 7.6 percent, what maximum initial investment would make the project acceptable?
Multiple Choice $516,751.56 $571,237.51 $1,026,395.85 $482,301.46 $550,008.71
Answer:
PV of cash inflow = $571,237.5
Explanation:
The maximum initial investment amount to be paid is the present value of the series of the annual cash inflow discounted at the opportunity cost rate of 7.6% per annum.
In other words,the maximum to be paid for the investment should be equal to the value today of the series of eight equal annual cash flow of $97,900 discounted at 7.6%
This is given in the relationship below:
PV of cash inflow = A ×( 1- (1+r)^(-n))/r )
A- equal annual cash - 97,900. r-rate of return - 7.6%, n-number of years- 8
PV = 97,900 × ( 1 - (1+0.076)^(-8)/0.76)= 571,237.5
PV of cash inflow = $571,237.5
