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Bridget Jones has a contract in which she will receive the following payments for the next...

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

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Expert Solution

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

jeff jeffy answered 1 year ago
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