1) A company has an opportunity to invest in a project which will earn cash flows of $100,000 in the first year, $200,000 in the second year and $350,000 in the third year. If their investor's required return is 12%, what is the most the company should pay for the project? (Enter only numbers and decimals in your response. Round to 2 decimal places.)

2) A business has an project that will bring in annual cash flows of $250,000 for 8 years. The company's investor's require a return of 12%. What is the most the company should pay for the project? (Enter only numbers and decimals in your response. Round to 2 decimal places.)

Question

Leonardo Sloan

Business

10 October, 10:09

1) A company has an opportunity to invest in a project which will earn cash flows of $100,000 in the first year, $200,000 in the second year and $350,000 in the third year. If their investor's required return is 12%, what is the most the company should pay for the project? (Enter only numbers and decimals in your response. Round to 2 decimal places.)

2) A business has an project that will bring in annual cash flows of $250,000 for 8 years. The company's investor's require a return of 12%. What is the most the company should pay for the project? (Enter only numbers and decimals in your response. Round to 2 decimal places.)

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Answers (1)

Know the Answer?

Clarissa Holmes · Answer 1

1. $497,847.58

2. $1,241,900.00

Explanation:

The computation of the present value is shown below:

1. Year Cash flows Discount factor Present value

1 $100,000.00 0.8928571429 $89,285.71

2 $200,000.00 0.7971938776 $159,438.78

3 $350,000.00 0.7117802478 $249,123.09

Present value $497,847.58

The discount factor is computed below:

= 1 : (1 + rate) ^ years

2. Since the cash flows are same for the 8 years, so we use the PVIFA factor that is shown below:

= Annual cash flows * PVIFA factor for 8 years at 12%

= $250,000 * 4.9676

= $1,241,900.00

Refer to the PVIFA table