Rylan Inc is considering a project that has an initial cost of $2 million.It is expected to generate cash flows for the firm of $500,000 per year for 6 years.Assuming a discount rate of 7%,what is the equivalent annual benefit?
A)$75,148
B)$80,408
C)$85,889
D)$91,901

Question

Quizplus · Accepted Answer

To find the equivalent annual benefit, we need to find the annual payment that would generate the same present value as the project's cost and cash flows. Using the formula for present value of an annuity, we get:

PV = C * [(1 - (1+r)^-n) / r]

Where PV is the present value, C is the annual cash flow, r is the discount rate, and n is the number of years.

Plugging in the values from the problem, we get:

PV = $2,000,000 - $500,000 * [(1 - (1+0.07)^-6) / 0.07]
PV = $1,383,097

Now we need to solve for the annual payment (C) that would give us a present value of $1,383,097. Rearranging the formula above, we get:

C = PV * r / (1 - (1+r)^-n)
C = $1,383,097 * 0.07 / (1 - (1+0.07)^-6)
C = $80,408

Therefore, the equivalent annual benefit is $80,408. Choice B is the correct answer.

Rylan Inc Is Considering a Project That Has an Initial