Question

Bridget Jones has a contract in which she will receive the following payments for the next five years: $22,000, $23,000, $24,000, $25,000, and $26,000. She will then receive an annuity of $28,000 a year from the end of the 6th through the end of the 15th year. The appropriate discount rate is 12 percent. a. What is the present value of all future payments? Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) b. If she is offered $170,000 to cancel the contract, should she do it? Yes No

Answer 1

Discount rate	12.000%
Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
Cash flow stream	0	22000	23000	24000	25000	26000	28000	28000	28000	28000	28000	28000	28000	28000	28000	28000
Discounting factor	1.000	1.120	1.254	1.405	1.574	1.762	1.974	2.211	2.476	2.773	3.106	3.479	3.896	4.363	4.887	5.474
Discounted cash flows project	0.000	19642.857	18335.459	17082.726	15887.952	14753.098	14185.671	12665.778	11308.730	10097.081	9015.251	8049.331	7186.903	6416.877	5729.355	5115.495
PV = Sum of discounted cash flows
PV =	175472.56
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

If she is offered 170000 she shouldnot cancel as it it is lesser than present value of future cash flows