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%?
A) $33,520
B) $56,860
C) $62,540
D)$75,000

Question

Quizplus · Accepted Answer

We can use the formula for present value of an annuity to calculate the maximum amount the firm should pay. 
PV = C[1 - 1/(1+r)^n]/r 
where PV = present value, C = cash flow per period, r = discount rate, and n = number of periods. 
Substituting the given values, we get: 
PV = $15,000[1 - 1/(1+0.1)^5]/0.1 
PV = $56,859.65 (rounded to nearest dollar) 
Therefore, the approximate maximum amount the firm should consider paying is $56,860. Option B is the correct answer.

What Is the Approximate Maximum Amount That a Firm Should