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 18%?

Answer 1

Answer:

The firm should pay $46907.57 for the given project.

Explanation:

Given information:

Return = $15000 annually

Time = 5 years

Opportunity cost = 18%

The formula for payment is

$PV=R(\frac{1}{OC}-\frac{1}{OC(1+OC)^t})$

where, R is return, OC is opportunity cost, t is time in years.

Substitute R=15000, t=5 and OC=0.18 in the above formula.

$PV=15000(\frac{1}{0.18}-\frac{1}{0.18(1+0.18)^5})$

$PV=46907.5653141$

$PV\approx 46907.57$

Therefore the firm should pay $46907.57 for the given project.