Question

Mustard's Inc. sold the rights to use one of its patented processes that will result in cash receipts of $3,600 at the end of each of the next three years and a lump sum receipt of $5,100 at the end of the fourth year. The total present value of these payments if interest is at 9% is:

Answer 1

Total present value of the payments=$11,263.96

Step-by-step explanation:

Step 1: Determine the total future value of all the payments

For the next 3 year;

Total future value=3,600×3=$10,800

For the fourth year;

Total future value=$5,100

At the end of 4 years, Mustard's Inc will have a future value of;

5,100+10,800=$15,900

Step 2: Determine the present value of all the payments

Using the formula;

F.V=P.V(1+r)^n

where;

F.V=future value

P.V=present value

r=interest rate

n=number of years

In our case;

F.V=$15,900

P.V=unknown

r=9%=9/100=0.09

n=4 years

replacing;

15,900=P.V(1+0.09)^4

15,900=1.4116 P.V

P.V=15,900/1.4116

P.V=11,263.96

Total present value of the payments=$11,263.96