Question

Mongoose Trucking just signed a $3.8 million contract. The contract calls for a payment of $1.1 million today, $1.3 million one year from today, and $1.4 million two years from today. What is this contract worth today at a discount rate of 8.7 percent?

Answer 1

The present value or the worth of the contract today is 3.48 million

Step-by-step explanation:

The present value of the contract can be calculated using the following formula where we will dicount back the cash flows to calculate the present value.

The present value = CF1 / 1+discount rate + CF2 / (1+discount rate)² +...

The present value = 1100000 + 1300000 / 1.087 + 1400000 / 1.087² = $3480817.37 or 3.48 million

The present value or the worth of the contract today is 3.48 million