What is the maximum that should be invested in a project at time zero if the inflows are estimated at $25,000 annually for four years, and the cost of capital is 9%?Question 2Select one:a.$19,007.00b.$25,000.00c.$91,743.12d.$80,993.00
Question
What is the maximum that should be invested in a project at time zero if the inflows are estimated at 19,007.00b.91,743.12d.$80,993.00
Solution
To answer this question, we need to calculate the present value of the future cash inflows from the project. The formula for the present value (PV) is:
PV = CF / (1 + r)^n
where:
- CF is the cash inflow per period (in this case, $25,000 annually),
- r is the discount rate (in this case, 9% or 0.09), and
- n is the number of periods (in this case, 4 years).
We need to calculate this for each year and then sum up these values.
For year 1: PV1 = 22,935.78
For year 2: PV2 = 21,051.62
For year 3: PV3 = 19,305.15
For year 4: PV4 = 17,700.14
Adding these up, the total present value of the cash inflows is:
PV = PV1 + PV2 + PV3 + PV4 = 21,051.62 + 17,700.14 = $80,992.69
So, the maximum that should be invested in the project at time zero is approximately $80,993.00 (option d).
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