Question

A company is considering an investment project that would cost $8 million today and yield a payoff of $10 million in 5 years.

Answer 1

Answer:

Kindly see explanation

Explanation:

Given the following:

Initial investment = $8,000,000

Future value (FV) = $10,000,000

PERIOD (t) = 5 Years

To know if the form should undertake the project, the present value(PV) at each interest rate should be calculated ;

A.) Interest rate (r) = 7% = 0.07

PV = FV / (1 + r)^t

PV = 10,000,000 / (1 + 0.07)^5

PV = 10,000,000 / 1.07^5

PV = 10,000,000 / 1.4025517307

PV = $7,129,861.79483668

Should not be undertaken, PV is less than initial investment.

B.) Interest rate (r) = 6% = 0.06

PV = FV / (1 + r)^t

PV = 10,000,000 / (1 + 0.06)^5

PV = 10,000,000 / 1.06^5

PV = 10,000,000 / 1.3382255776

PV = $7,472,581.72866057

Should not be undertaken, PV is less than initial investment.

C.) Interest rate (r) = 5% = 0.05

PV = FV / (1 + r)^t

PV = 10,000,000 / (1 + 0.05)^5

PV = 10,000,000 / 1.05^5

PV = 10,000,000 / 1.2762815625

PV = $7,835,261.66468459

Should not be undertaken, PV is less than initial investment

D.)Interest rate (r) = 4% = 0.04

PV = FV / (1 + r)^t

PV = 10,000,000 / (1 + 0.04)^5

PV = 10,000,000 / 1.04^5

PV = 10,000,000 / 1.2166529024

PV = $8,219,271.06759351

Should be undertaken, PV is greater than initial investment