Question

Determine the difference in the present worth of the following two commodity contracts at an interest...

Determine the difference in the present worth of the following two commodity contracts at an interest rate of 8% per year. Contract 1 has a cost of $10,000 in year 1; this cost will escalate at a rate of 4% per year for ten years. Contract 2 has a present cost of $80,520.

$1,750

$1,845

$2,170

$1,930
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Answer #1

The calculation for Contract 1 :

CONTRACT 1
Year Cost Discount Factor @8% Discounted Cash flow
1 10,000 0.9259 9,259
2 10,400 0.8573 8,916
3 10,816 0.7938 8,586
4 11,249 0.7350 8,268
5 11,699 0.6806 7,962
6 12,167 0.6302 7,667
7 12,653 0.5835 7,383
8 13,159 0.5403 7,110
9 13,686 0.5002 6,846
10 14,233 0.4632

6,593


Hence, the total present worth of contact 1

=$(9259+8916+8586+8268+7962+7667+7383+7110+6846+6593) = $78590...

Total present worth of contract 2 = $80520..

Hence, the difference between present worth

= $80520 - $78590 = $1930..

(Please give an up vote if you find it helpful)..

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