Question

What is the maximum amount a firm should pay for a project that will return $15,000 annually for 5 years if the opportunity cost is 10%

Answer 1

Answer:

$56,861.80  

Explanation:

The maximum price an investor would pay an investment today is the present value of the investment's future cash flows discounted by the opportunity cost of capital of 10%.

Present value of a future cash flow=future cash flow/(1+cost of capital)^n

n refers to the period in which the cash flow is expected , for instance,for year 1 cash flow n is 1, 2 for year 2 and so on.

PV=$15,000/(1+10%)^1+$15,000/(1+10%)^2+$15,000/(1+10%)^3+$15,000/(1+10%)^4+$15,000/(1+10%)^5

PV=$56,861.80