Question

1. You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual payments of $50,000 for the next five years. At a discount rate of 10%, what is this job worth to you today?

Answer 1

Answer:

$ 31055

Explanation:

Present Value is the valuation of future money in terms of present monetary value, adjusting with regards to inflation rate.

Present Value = Future Value

                             (1+r)^n  

where r = Discount Rate , n = no. of periods

Putting in the formula,

PV = 50000 / [(1+ 0.10)^5]

50000 / [(1.1)^5]

50000 / 1.61

= $ 31055

Answer 2

Today, the worth of the sub-contracting job is $189,539.34.

Data and Calculations:

N (# of periods) = 5 years

I/Y (Interest per year) = 10%

PMT (Periodic Payment) = $50,000

FV (Future Value) = $0

Results:

Present Value (PV) = $189,539.34

The Sum of all periodic payments = $250,000.00 ($50,000 x 5)

Total Interest $60,460.66

Thus, the worth of the job today is $189,539.34.

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