Question

Don Draper has signed a contract that will pay him $75,000 at the end of each...

Don Draper has signed a contract that will pay him $75,000 at the end of each year for the next 6 ​years, plus an additional $120,000 at the end of year 6. If 8 percent is the appropriate discount​ rate, what is the present value of this​ contract?

a. The present value of the contract is ​$____(round to the nearest cent)

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Answer #1

Present Value of the Contract

Year

Annual cash flows ($)

Present Value Factor (PVF) at 8.00%

Present Value of annual cash flows ($)

[Annual cash flow x PVF]

1

75,000

0.92592593

69,444.44

2

75,000

0.85733882

64,300.41

3

75,000

0.79383224

59,537.42

4

75,000

0.73502985

55,127.24

5

75,000

0.68058320

51,043.74

6

195,000

[120,000 + 75,000]

0.63016963

122,883.08

TOTAL

422,336.33

Therefore, the Present Value of the Contract will be $422,336.33

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.

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