What is the approximate maximum amount that a firm should consider paying for a project that will return $15,000 annually for 5 years if the opportunity cost is 10 percent?
A)$33,520
B)$56,862
C)$62,540
D)$75,000

Question

Quizplus · Accepted Answer

The maximum amount a firm should consider paying can be calculated using present value formula:
PV = (Annual Return / Discount Rate) x [1 - 1 / (1 + Discount Rate)^n]
Where, 
Annual Return = $15,000
Discount Rate = 10% or 0.1
n = 5 years

Putting the values in the formula, we get:
PV = (15,000 / 0.1) x [1 - 1 / (1+ 0.1)^5]
    = 150,000 x [1 - 0.6209]
    = $56,862

Therefore, the firm should pay a maximum of $56,862 for the project. The closest option is B, which is the answer.

What Is the Approximate Maximum Amount That a Firm Should