Answer:
Hence, the the maximum amount the company could invest in the project is $1081432.86 and yes, the project should be accepted as the value is greater than initial investment.
Therefore, the correct option is b. $1,081,434
Explanation:
Here, maximum amount means the sum of present value of all cash inflows
So,
Present value = all Year cash inflows × Discounted factor of each year
where,
Year 1, year 2, year 3, year 4, and year 5 have same cash flows i.e. $300,000
But the discounted factor is different in each year
The calculation of discounted factor = 1 ÷ (1+0.12) ^ 1
where,
0.12 = rate
^1 = for year 1, ^2 = for year 2 and so on.
The discounted rate for year 1, , year 2, year 3, year 4, and year 5 is 0.8929
, 0.7972
, 0.7118
, 0.6355
, 0.5674 respectively.
Now, multiply the cash flow amount with discounted rate for each year to get presented value of all years.
Year 1 = $300,000 × 0.8929 = $267,857.14
Year 2 = $300,000 × 0.7972 = $239,158.16
Year 3 = $300,000 × 0.7118 = $213,534.07
Year 4 = $300,000 × 0.6355 = $190,655.42
Year 5 = $300,000 × 0.5674 = $170,228.06
Then, sum all the presented values of all year to get maximum amount
= $267,857.14 + $239,158.16 + $213,534.07 + $190,655.42 + $170,228.06
= $1,081,432.86
So, we attached the sheet for better understanding.
Hence, the the maximum amount the company could invest in the project is $1081432.86 and yes, the project should be accepted as the value is greater than initial investment.
Therefore, the correct option is b. $1,081,434
