Question

Lester's just signed a contract that will provide the firm with annual cash inflows of $28,000, $35,000, and $42,000 over the next three years with the first payment of $28,000 occurring one year from today. What is this contract worth today at a discount rate of 7.25%?

Answer 1

$64,474.20

Step-by-step explanation:

As for the information provided,

discount rate = 7.25%

First payment will be made at the end of year 1

Discounting factor =
`(1)/((1+0.0725)^1) = 0.9324`

Thus, current value of payment =
`28,000 * 0.9324` = $26,107.20

Discounting factor for receipts =

Year 1 =
`(1)/((1+0.0725)^1) = 0.9324` = $28,000
`*` 0.9324 = 26,107.20

Year 2 =
`(1)/((1+0.0725)^2) = 0.8694 = 35,000 * 0.8694 = 30,429`

Year 3 =
`(1)/((1+ 0.0725)^3) = 0.8106 = 42,000 * 0.8106 = 34,045.20`

Therefore, value of contract today = - $26,107.20 + $26,107.20 + $30,429.0 + $34,045.20 = $64,474.20