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Betty Kay has a contract in which she will receive the following payment for the next...

Betty Kay has a contract in which she will receive the following payment for the next 5 year: $1,000, $2,000, $3,000, $4,000 and $5,000. She will then receive an annuity of $8,500 a year for the end of the 6th through the end of the 15th year. She is offered $30,000 to cancel the contract. If the payments are discounted at 14 percent should she cancel the contract? Show all workings.

Please work using the Financial Calculator

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Homework Answers

Answer #1

We will find the net present value (NPV) of the given cash flows. If NPV is less than $30,000, we will accept $30,000 to cancel the contract, otherwise no.

NPV of the cash flows

Clear cash flows in the calculator

2ND CF CE|C

Press CF

Enter the following keys:

CF0 = 0

ENTER

Down arrow

C01 = -1000

ENTER

Down arrow

F01 = 1

Down arrow

C02 = -2000

ENTER

Down arrow

F02 = 1

Down arrow

C03 = -3000

ENTER

Down arrow

F03 = 1

Down arrow

C04 = -4000

ENTER

Down arrow

F04 = 1

Down arrow

C05 = -5000

ENTER

Down arrow

F05 = 1

Down arrow

C06 = 8,500

ENTER

F06 = 10

ENTER

CPT NPV

I = 14

ENTER

Down arrow

CPT

NPV = $13,621.03262

NPV < $30,000

So, it is better to cancel the contract and accept $30,000

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