A company is considering a project with annual after-tax cash flows of $2,100.00

Question

A company is considering a project with annual after-tax cash flows of $2,100.00 per year for six years. The company's cost of capital is 14 percent. Present and future value factors for a 14 percent interest rate for six years are as follows:

Future value of $     2.195

Present value of $   0.456

Future value of a series of equal payments 8.536

Prersent valuye of a series of equal payments 3.889

Using the net present value method, what is the maximum amount that the comany should invest?

a) $957.60

B) $8, 166.90

C) $17,925.60

D) $4,609.50

Explanation / Answer

Annual Future after tax cash flows = $2100 per year, for six years

Present Value of a series of equal payments = 3.889

Total Present Value of $12,600 [$2100 x 6 years] = $2100 x 3.889 = $8166.9

hence, if a the company invest a minimum of $8166.9, the NPV will be zero.
Any amount invested above this figure will give negative NPV

Therefore, the maximim amount that the company should invest is Option - B $8,166.9

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.