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Present Value

A firm with a cost of capital of 13.5% has a contract to sell an asset for $230,000 in five years. The asset costs $111,000 to produce today (at t = 0). In addition to the initial production costs, the firm will incur annual maintenance and carrying costs related to the asset. What is the maximum annual carrying cost that the firm can bear and still make this an advisable investment for the firm? (Hint: recall that investments are advisable only if the Present Value of the Costs is less than the Present Value of the Benefits. Also, please show a timeline.

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You can use a financial calculator to solve for the "Payment Amount". If you do not have a financial calculator, I recommend that ...

Solution Summary

The solution uses the present value concepts to calculate the periodic payment amount for the scenarion mentioned in the question.