Question

Jacob developed a new style of camping trailer. He is considering a licensing agreement with​ Easy-Tow, who will manufacture the new trailer. They are proposing to pay him ​$33,000 ​now, and ​$11,000 at the beginning of each of the twelve years of the licensing​ agreement, starting in one year. If interest is 8.4​% compounded semi-annually​, what is the agreement worth​ today?

Answer 1

The value of the licensing agreement today is $93,500.23

Step-by-step explanation:

The value of the licensing agreement today can be calculated using the present value formula. Since the agreement involves receiving a fixed amount of $11,000 per year for twelve years, we need to calculate the present value of this annuity. The formula for calculating the present value of an annuity is:

PV = C * (1 - (1 + r/n)^(-nt))/(r/n),

Where PV is the present value, C is the cash flow per period, r is the interest rate, n is the number of compounding periods per year, and t is the number of years.

Using the given information, we can calculate the present value of the annuity:

PV = 11,000 * (1 - (1 + 0.084/2)^(-12*2))/(0.084/2)

PV = $93,500.23