Question

Red” Herring will receive $11,000 a year for the next 18 years as a result of his patent. At present, 9 percent is an appropriate discount rate. Use Appendix D. (Round "PV Factor" to 3 decimal places. Round the final answers to the nearest whole dollar.)

a-1. What is the current value of the future payments?

Present value            $

a-2. Should he be willing to sell out his future rights now for $100,000?

• Yes

• No

b-1. What is the current value, if they are received at the beginning of each year?

Present value            $

b-2. Would he be willing to sell his future rights now for $100,000, if the payments will be made at the beginning of each year?

• Yes

• No

Answer 1

a1)

Present value of annuity = payment per period * [1-(1+i)^-n]/i  

i = interest rate per period

n = number of periods

=>

present value = 11000 * [1-(1+0.09)^-18]/0.09  

=  96311.88

a2)

Yes, Since present value is less than offered price

b1)

Present value of annuity due= payment per period * [1-(1+i)^-n]/i *(1+i)

i = interest rate per period

n = number of periods

Present value = 11000 * [1-(1+0.09)^-18]/0.09 * (1+0.09)

= 104979.95

b2)

No