Question

ST Trucking just signed a $3.8 million contract. The contract calls for a payment of $1.1 million today, $1.3 million one year from today, and $1.4 million two years from today. What is this contract worth today at a discount rate of 8.7 percent?

A) $3,783,648.48
B) $3,480,817.37
C) $2,108,001.32
D) $3,202,223.89
E) $3,202,840.91

Answer 1

Answer: Option (B)

Step-by-step explanation:

Given :

Contract = $3.8 million

Initial Payment = $1.1 million

Payment - Year One = $1.3 million

Payment - Year Two = $1.4 million

From the given information , we can evaluate the current value of the contract using present value:

`Present\ Value=(Cash\ flow)/((1 + r)^n)`

`Present\ Value = 1.1\ million + (1.3\ million)/((1+0.087)^1) + (1.4\ million)/((1+0.087)^2)`

Present Value = $3,480,817.37