Question

Suppose you signed a contract for a special assignment over the next 8.0 years. You will be paid $6,641.00 at the end of each year. If your required rate of return is 11%, what is this contract worth in today?

Answer 1

The contract is worth approximately $30,390.56 in today's value.

Step-by-step explanation:

To calculate the present value of the stream of payments received from the contract, we can use the present value formula. The formula is:

Present Value = Payment / (1 + Rate)Year

Let's calculate the present value of each payment:

Year 1: $6,641 / (1 + 0.11)1 = $5,973.60

Year 2: $6,641 / (1 + 0.11)2 = $5,391.01

Year 3: $6,641 / (1 + 0.11)3 = $4,862.56

...

Year 8: $6,641 / (1 + 0.11)8 = $2,389.69

To calculate the present value of the contract, we sum up all the present values:

Present Value = $5,973.60 + $5,391.01 + $4,862.56 + ... + $2,389.69

The contract is worth approximately $30,390.56 in today's value.