Question

Les Moore retired as president of Goodman Snack Foods Company but is currently on a consulting contract for $55,000 per year for the next 14 years. Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

a. If Mr. Moore’s opportunity cost (potential return) is 12 percent, what is the present value of his consulting contract? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
  

b. Assuming Mr. Moore will not retire for two more years and will not start to receive his 14 payments until the end of the third year, what would be the value of his deferred annuity? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

Question a:

P = Annual Payment = $55,000

n = 14 years

r = rate of return = 12%

Present Value of Annuity = P * [1 - (1+r)^-n] / r

= $55,000 * [1 - (1+12%)^-14] / 12%

= $55,000 * 0.795380187 / 0.12

= $364,549.253

Therefore, present value of his consulting contract is $364,549.25

Question b:

P = Annual Payment = $55,000

n = 14 years

n1 = 2 years

r = rate of return = 12%

Present Value of Annuity = [P * [1 - (1+r)^-n] / r] / (1+r)^n1

= [$55,000 * [1 - (1+12%)^-14] / 12%] / (1+12%)^2

= [$55,000 * 0.795380187 / 0.12] / 1.2544

= $364,549.253 / 1.2544

= $290,616.433

Therefore, present value of his consulting contract is $290,616.43