ST Trucking just signed a $3.8 million contract. The contract calls for a payment of $1.1 million today, $1.3 million one year from today, and $1.4 million two years from today. What is this contract worth today at a discount rate of 8.7 percent?

The worth of the contract today = $3,480,817.37

Explanation:

To determine the worth of the contract today,

We will work out the present value of each of the expected future cash cash payment at a discount rate rate of 8.7% and sum them.

The present valus of the payments indicate how much they worth today if the ST Trucking can invest at a rate of 8.7% per annum

This is done as follows:

PV = 1,100,00 * (1.087) ^ (-0) + (1,300,000 * (1.087) ^ (-1) + (1400000 * (1.087) ^ (-2)

PV = 1,100,000 + 1,195,952.2 + 1,184,865.2

= $3,480,817.37

The worth of the contract today = $3,480,817.37