Question

given a cost of 70,000 now year 0 15,000 in year 10 an annual cost of 2000 and an annual revenue of 15,000 over 20 years n what is the maximum that you'd be willing to pay for capital asset if you expected a 6% return on your investment

Answer 1

Answer:

The maximium cost I would be willing to purchase the asset is 26.033,84‬ above this price the investment will not yield the 6% return.

Explanation:

We calcualte the present value of all cash flows:

annual cashflow:

15,000 revenue - 2,000 expenses = 3,000

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 3,000.00

time 20

rate 0.06

$3000 \times \frac{1-(1+0.06)^{-20} }{0.06} = PV$

PV $34,409.7637

Pv of the 10th year investment:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $15,000.0000

time  10.00

rate  0.06000

$\frac{15000}{(1 + 0.06)^{10} } = PV$  

PV   8,375.9217

present value of the cashflow

34,409.7637 - 8,375.92 = 26.033,84‬