Question

You have just been offered a contract worth $ 1.03 million per year for 6 years.​ However, to take the​ contract, you will need to purchase some new equipment. Your discount rate for this project is 12.5 %. You are still negotiating the purchase price of the equipment. What is the most you can pay for the equipment and still have a positive NPV​? The most you can pay for the equipment and achieve the 12.5 % annual return is ​$ nothing million.  ​(Round to two decimal​ places.)

Answer 1

Maximum price we can pay = Present vlaue of future cash flow
Computation of present vlaue of cash flow
i	ii	iii	iv=ii*iii
year	Cash flow	PVIF @ 12.5%	Present value
1	1.03	0.888889	0.92
2	1.03	0.790123	0.81
3	1.03	0.702332	0.72
4	1.03	0.624295	0.64
5	1.03	0.554929	0.57
6	1.03	0.49327	0.51
Present value			4.18
therefore price we can pay =			4.18	million