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)$56,860
C)$62,540
D)$75,000 PV = $15,000

Question

Quizplus · Accepted Answer

To calculate the maximum amount the firm should consider paying for the project, we need to use the present value formula and solve for the present value (PV).

PV = CF / (1+r)^n

Where:
CF = Cash Flow per year
r = Opportunity cost or Discount rate
n = Number of years

In this case, CF = $15,000, r = 10%, and n = 5.

PV = $15,000 / (1+0.10)^5
PV = $15,000 / 1.61051
PV = $9,311.42

Therefore, the maximum amount the firm should consider paying for the project is the present value of the cash flows or $9,311.42.

Among the given choices, only option B ($56,860) is higher than the calculated present value of $9,311.42, so the best choice is B.

What Is the Approximate Maximum Amount That a Firm Should