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The HRI company is considering selling its School of Business to Yale. The proposed deal would...

The HRI company is considering selling its School of Business to Yale. The proposed deal would require Yale to pay HRI $30,000 and $25,000 at the end of years 1 and 2, and to also make yearly payments (at the end of the year) of $15,000 in years 3 through 9. Yale would make a final payment to HRI for $10,000 at the end of year 10. If the discount rate is 12% what is the present value of the series of payments?

Solutions

Expert Solution

Present value = Future value / (1 + rate)^time

Present value of 1st set of cash flows = 30,000 / (1 + 0.12)^1 + 25,000 / (1 + 0.12)^2

Present value of 1st set of cash flows = 26,785.71429 + 19,929.84694

Present value of 1st set of cash flows = $46,715.56123

Present value of 2nd set of cash flows in year 2 = Annuity * [1 - 1 / (1 + rate)^time] / rate

Present value of 2nd set of cash flows in year 2 = 15,000 * [1 - 1 / (1 + 0.12)^7] / 0.12

Present value of 2nd set of cash flows in year 2 = 15,000 * [1 - 0.45235] / 0.12

Present value of 2nd set of cash flows in year 2 = 15,000 * 4.56376

Present value of 2nd set of cash flows in year 2 = $68,456.4808

Present value of 2nd set of cash flows today = 68,456.4808 / (1 + 0.12)^2

Present value of 2nd set of cash flows today = 68,456.4808 / 1.2544

Present value of 2nd set of cash flows today = $54,573.08737

Present value of final cash flow = 10,000 / (1 + 0.12)^10

Present value of final cash flow = 10,000 / 3.10585

Present value of final cash flow = $3,219.7324

Present value of series of cash flows = 3,219.7324 + 54,573.08737 + 46,715.56123

Present value of series of cash flows = $104,508.28

jeff jeffy answered 2 years ago
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