Final answer:
To calculate the present worth of the investment, we use the concept of present discounted value (PDV). We discount each future profit using an interest rate and then sum up the present values for the different time periods.
Step-by-step explanation:
To calculate the present worth of an investment, we need to apply the concept of present discounted value (PDV). PDV is the amount you should be willing to pay in the present for a stream of expected future payments. In this case, we have the expected future profits of Bailey Inc. from the new gang punch. We can calculate the PDV by discounting each future profit using an interest rate. Then, we add up the present values for the different time periods to get the final answer.
For example, if the expected profits are $10,000 in the first year and the interest rate is 5%, the present value of that profit would be $9,523.81 (calculated as $10,000 / (1 + 0.05) ^ 1). We repeat this calculation for each future profit and then sum up all the present values to get the final answer, which represents the present worth of the investment.