Question

In: Finance

Your business is offered a contract that pays $386,427 every quarter for three years. What is...

Your business is offered a contract that pays $386,427 every quarter for three years. What is the contract worth to you today if the discount rate is 7.03% per quarter.

Solutions

Expert Solution

Solution :

The worth of the contract today if the discount rate is 7.03% per quarter = $ 3,064,367.18

= $ 3,064,367 ( when rounded off to the nearest whole number )

Note :

Formula for PVF for Quarter 1 = 1/(1+Discount rate)n where n =1 ;

= 1 / ( 1 + 0.0703 ) 1 = 1 / 1.0703 = 0.9343

For quarter 2 = 1/ (1+Disc. rate)n where n =2 ;

= 1 / ( 1 + 0.0703 ) 2 = ( 1 / 1.0703 ) 2 = 0.8279

(1+Disc. rate) is raised to the power of n = the quarter

In excel :

PV for Quarter 1 = 1/ 1.0703 = 0.9343 ; PV for Quarter 2 = F4 /1.0703 = 0.8729

PV for Quarter 3 = F5 /1.0703 = 0.8156 and so on.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

jeff jeffy answered 4 weeks ago
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