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    Calculating maximum amount that can be invested in a project

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    A project is expected to generate cash flows of $14,000 annually for six years plus an additional $27,000 in year 6. The cost of capital is 10%

    a.What is the most you can invest in this project at time 0 and still have a positive NPV?
    b.What is the most you can invest in this project at time 0 if you want to have a 15% IRR?

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    Solution Preview

    Please refer attached file for better clarity of tables and formulas.

    Solution:

    a. What is the most you can invest in this project at time 0 and still have a positive NPV?

    Let us see cash flows associated with the project
    Year End Cash flows PV Factor @10% PV of cash flow
    n Ci PVF=1/(1+10%)^n Ci*PVF
    1 14000 0.9091 12727.27
    2 14000 0.8264 11570.25
    3 ...

    Solution Summary

    The solution describes the steps to calculate maximum amount that can be invested in a project so that given criteria is satisfied.

    $2.19

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