White Company's required rate of return on capital budgeting projects is 12%.The company is considering an investment opportunity that would yield a cash flow of $10,000 in five years.What is the most that the company should be willing to invest in this project? (Ignore income taxes in this problem.)(Round your PV factor to 5 decimal places and final answer to nearest whole dollar amount.)
A) $2,774.
B) $5,674.
C) $17,637.
D) $36,050.

Question

Quizplus · Accepted Answer

To find the maximum investment White Company should be willing to make, we need to calculate the present value of the future cash flow of $10,000 using the required rate of return of 12%. The present value (PV) formula is PV = FV / (1 + r)^n, where FV is the future value, r is the rate, and n is the number of periods. Plugging in the values, we get PV = $10,000 / (1 + 0.12)^5. Using the given rounding instructions, the PV factor to 5 decimal places is approximately 0.5674. Therefore, PV ≈ $10,000 * 0.5674 = $5,674. This is the most the company should be willing to invest in the project.

White Company's Required Rate of Return on Capital Budgeting Projects