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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.)

Respuesta :

Answer:

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

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