Johnson corp. has an 8% required rate of return. it's considering a project that would provide annual cost savings of $50,000 for 5 years. the most that johnson would be willing to spend on this project is present value pv of an annuity
year of 1 at 8% of 1 at 8%
1 .926 .926
2 .857 1.783
3 .794 2.577
4 .735 3.312
5 .681 3.993
select one:
a. $125,910.
b. $165,600.
c. $199,650.
d. $34,050.

The answer is c. $199,650.

Explanation:

The most that Johnson would be willing to spend initially on this project is equal to the net present value of the cost savings the project generates discounted at the required rate of return of 8%.

As the project generates 5 equal annual cost saving, each at $50,000 annually, the net present value of the cost savings the project generates is calculated as:

Annual cost saving x Present value factor = 50,000 x 3.993 = $199,650. which is also the most that Johnson would be willing to spend initially on this project as explained above.

Thus, the answer is c. $199,650.

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