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You have just been offered a contract worth $1.24 million per year for 5 years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 11.8%. 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?

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Answer #1

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$1.24[1-(1.118)^-5]/0.118

=$1.24*3.622708293

=$4.49million (or $4,492,158.28 approx).

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