Question

Beene Distributing is considering a project that will return $150,000 annually at the end of each year for six years. If Beene demands an annual return of 7% and pays for the project immediately, how much is it willing to pay for the project? (Use Table B.3) (Round "PV Factor" to 4 decimal places. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Answer 1

Answer:

$714,975

Explanation:

Data provided in the question:

Annual return = $150,000

Time, n = 6 years

Annual return, r = 7% = 0.07

Now,

Amount willing to pay for the project

= Present value of annual cash flows discounted at 7%

= $150,000 × [ (1 - (1 + r)⁻ⁿ ) ÷ r ]

=  $150,000 × [ (1 - (1 + 0.07 )⁻⁶ ) ÷ 0.07 ]

= $150,000 × 4.7665

= $714,975