Question

Global Enterprises has just signed a $3 million contract. The contract calls for a payment of $.5 million today, $0.9 million one year from today, and $1.6 million two years from today. What is this contract really worth if Global Enterprises can earn 12 percent on its money?

Answer 1

Answer:

$2.579 million

Explanation:

To obtain the real worth of the contract, the $0.9 million payment must be brought back by one period at a 12% rate while the $1.6 million payment must be brought back by  two periods at a 12% rate. The present value of the contract is:

$P = 0.5+\frac{0.9}{(1+0.12)} +\frac{1.6}{(1+0.12)^2}\\P=\ 2.579\ million$

Global Enterprises' contract is actually worth $2.579 million.