Question

A gaming company would like to license a game that you've created. They are willing to pay you in 5 annual installments. The first installment of $215014 will be 3 years from now. The payments will then increase by 5% every year and will be made exactly a year apart.

What is the value of the contract today at a 4% discount rate?

Select one:

a. $ 1053792

b. $ 936818

c. $ 1075726

d. $ 955737

e. $ 974290

Answer 1

Solution :

The Answer is (e) $ 974,290.

Working :

Year	Cash Flow	Discount Factor @ 4% ( 1 / 1+r)n	Present Value
Year 1
Year 2
Year 3	$ 215,014	0.888996	$ 191,147
Year 4	$ 215,014 * 1.05 = $ 225,765	0.854804	$ 192,984
Year 5	$ 225,765 * 1.05 = $ 237,053	0.821927	$ 194,840
Year 6	$ 237,053 * 1.05 = $ 248,906	0.790315	$ 196,714
Year 7	$ 248,906 * 1.05 = $ 261,351	0.759918	$ 198,605
Total			$ 974,290

Note : Discount Factor has been rounded to 6 decimal place to get the accurate answer.

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