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Lester's just signed a contract that will provide the firm with annual cash inflows of $28,000,...

Lester's just signed a contract that will provide the firm with annual cash inflows of $28,000, $35,000, and $42,000 over the next three years. Then the firm will receive a $15,000 annuity for five year. Finally, $8,000 annual payment, delivered by the contract, is believed to be permanent.

1) What is the present value of the perpetuity?

2) What is the present value of the annuity?

3) What is the present value of the first three years cash inflows?

4) What is the total present value delivered by the contract?

Please also show your process

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Answer #2

*Assuming discount rate 10%.

Discounting factor = 1/(1+0.10)^t

1) PV of perpetuity = 8000/10% = $80000

2) PV of annuity = $42,721.11 (Sum of PV of annuity payments).

3) PV for first 3 yrs of cash flows = 85,935.39

4) PV of contract = $ 165,977.09.

If you have any doubts please let me know in the comments. Please give a positive rating if the answer is helpful to you. Thanks.

answered by: anonymous
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