Question

Chong is negotiating a contract to do some work for HAC Corporation over the next five years. HAC proposes to pay Chong RM10,000 at the end of each of the third, fifth and seventh years. No payments will be received prior to that time. If Chong discounts these payments at 8% compounded semi anuually, what is the contract worth to him today?

ANS : RM 20,433.54

Pls attach the formula used, and explain in detail. Pls do not answer in excel format. Thank you in advance.

Answer 1

We use the formula:
A=P(1+r/2)^2n
where
A=future value
P=present value
r=rate of interest
n=time period.

10,000=P1*(1+0.08/2)^(2*3)

P1=10,000/(1+0.08/2)^(2*3)

=$10000*0.790314525

=$7903.14525(Approx).

10,000=P2*(1+0.08/2)^(2*5)

P2=10,000/(1+0.08/2)^(2*5)

=$10000*0.675564168

=$6755.64168(Approx).

10,000=P3*(1+0.08/2)^(2*7)

P3=10,000/(1+0.08/2)^(2*7)

=$10000*0.577475082

=$5774.75082(Approx).

Hence current value =$7903.14525+$6755.64168+$5774.75082

=$20433.54(Approx).