Answer:
$695,603.10
Explanation:
The maximum amount that the firm would be willing to invest in the project to accept it can be calculated using the present value (PV) of an ordinary annuity stated as follows:
PV = P × [{1 - [1 ÷ (1+r)]^n} ÷ r] …………………………………. (1)
Where;
PV = Present value or the maximum amount to invest?
P = yearly yield = $10,000
r = required return rate = 12.05% annually = (12.05% ÷ 12) monthly = 1.0041667% monthly or 0.010041667
n = number of period = 10 years = 10 × 12 months = 120 months
Substituting the values into equation (1), we have:
PV = 10,000 × [{1 - [1 ÷ (1+0.010041667)]^120} ÷ 0.010041667]
= 10,000 × [{1 - [1 ÷ 1.010041667]^120} ÷ 0.010041667]
= 10,000 × [{1 - [0.990058165590509]^120} ÷ 0.010041667]
= 10,000 × [{1 - 0.301498531063694} ÷ 0.010041667]
= 10,000 × [0.698501468936306 ÷ 0.010041667]
= 10,000 × 69.5603099501613
PV = $695,603.10
The maximum amount that the firm would be willing to invest in the project to accept it is $695,603.10 .
The maximum amount that the firm would be willing to invest in the project is $695,603.10.
Here, we are going to calculate the maximum amount that the firm would be willing to invest in the project through the use of Present Value of ordinary annuity.
Given Information
P = $10,000
r = 1.0041667% (12.05% /12
n = 120 months (10 × 12 months)
PVOA = 10,000 * [{1 - [1 / (1+0.010041667)]^120} / 0.010041667]
PVOA = 10,000 * [{1 - [1 / 1.010041667]^120} / 0.010041667]
PVOA = 10,000 * [{1 - [0.990058165590509]^120} / 0.010041667]
PVOA = 10,000 * [{1 - 0.301498531063694} / 0.010041667]
PVOA = 10,000 * [0.698501468936306 / 0.010041667]
PVOA = 10,000 * 69.5603099501613
PVOA = $695,603.10
In conclusion, the maximum amount that the firm would be willing to invest in the project is $695,603.10.
See similar solution here
brainly.com/question/15170994
