Final answer:
To calculate the present discounted value of future profits, discount each future payment to its present value using the formula: Present discounted value = Future value / (1 + Interest rate)^number of years, summing each year's present value.
Step-by-step explanation:
To calculate the present discounted value of the future profits that are payable in advance, you would use the formula from Table C1 to discount each future payment to its present value. This calculation is based on the formula:
Present discounted value = Future value received / (1 + Interest rate)number of years t
For example, if a firm is making payments that you receive in the future, here is how you would calculate each:
- $15 million in present (already in present value)
- $20 million in one year = $20 million / (1 + Interest rate)
- $25 million in two years = $25 million / (1 + Interest rate)2
The sum of these present values is the total present value of the payments the firm will make. You need to determine the interest rate and the number of years into the future each payment is set to occur to carry out these calculations.