Civil Engineering consulting firms that provide services to outlying communities are vulnerable to a number of factors that affect the financial condition of the communities, such as bond issues and real estate developments. A small consulting firm entered into a fixed-price contract with a large developer, resulting in a stable income of $260,000 per year in years 1 through 3. At the end of that time, a mild recession slowed the development, so that parties signed another contract for $190,000 per year for 2 more years. Determine the present worth of the two contracts at an interest rate of 10% per year. The present worth of the two contracts is determined to be $

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Business

Jesus Compton

11 November, 06:57

Civil Engineering consulting firms that provide services to outlying communities are vulnerable to a number of factors that affect the financial condition of the communities, such as bond issues and real estate developments. A small consulting firm entered into a fixed-price contract with a large developer, resulting in a stable income of $260,000 per year in years 1 through 3. At the end of that time, a mild recession slowed the development, so that parties signed another contract for $190,000 per year for 2 more years. Determine the present worth of the two contracts at an interest rate of 10% per year. The present worth of the two contracts is determined to be $

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Phoenix Stone · Answer 1

= $894,329.13

Explanation:

The present worth of the contracts are the the present value of the streams of cash inflow discounted at the reacquire rate of return of 10%

Present Value of First contract

Present Value = A * (1 - (1+r) ^ (-n)) / r

= 260,000 * (1 - 1.1^ (-3) / 0.1

=$646,581.52

Present Value of Second contract

Present value in year 3

= 190,000 * (1 - 1.1^ (-2)) / 0.1

= 329,752.0661

Present value in year 0

PV in year 2 * (1+r) ^ (-n)

329,752.0661 * (1.1^ (-3)

=$247,747.60

Total present worth of contracts

=$247,747.60 + $646,581.52

= $894,329.13