Answer:
$695,603.10
Explanation:
The maximum amount that the firm would be willing to invest in the project to accept it can be calculated using the present value (PV) of an ordinary annuity stated as follows:
PV = P × [{1 - [1 ÷ (1+r)]^n} ÷ r] …………………………………. (1)
Where;
PV = Present value or the maximum amount to invest?
P = yearly yield = $10,000
r = required return rate = 12.05% annually = (12.05% ÷ 12) monthly = 1.0041667% monthly or 0.010041667
n = number of period = 10 years = 10 × 12 months = 120 months
Substituting the values into equation (1), we have:
PV = 10,000 × [{1 - [1 ÷ (1+0.010041667)]^120} ÷ 0.010041667]
= 10,000 × [{1 - [1 ÷ 1.010041667]^120} ÷ 0.010041667]
= 10,000 × [{1 - [0.990058165590509]^120} ÷ 0.010041667]
= 10,000 × [{1 - 0.301498531063694} ÷ 0.010041667]
= 10,000 × [0.698501468936306 ÷ 0.010041667]
= 10,000 × 69.5603099501613
PV = $695,603.10
The maximum amount that the firm would be willing to invest in the project to accept it is $695,603.10
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