Civil engineering consulting firms that provide services to outlying communities

Question

Civil engineering consulting firms that provide services to outlying communities are vulnerable to a number of factors that affect the financial condition of the communities, such as bond issues, real estate developments, etc. A small consulting firm entered into a fixed- price contract with a spec home builder, resulting in a stable income of $345,000 per year in years 1 through 7. At the end of that time, a mild recession slowed the development, so the parties signed another contract for $170,000 per year for 2 more years. Determine the present worth of the two contracts at an interest rate of 13% per year. The present worth of the two contracts is determined to be $

Explanation / Answer

First contract

Each year amount = 345000

PVAF @ 13 % FOR 7 YEARS = 4.42

Present value of first contract = 345000*4.42 = 1524900

Second contract

Each year amount = 170000

Present worth of contract = Pv of 8th year + pv of 9th year

pv of 8th year = 170000 * PVIF of 8th year = 170000*0.376 = 63920

Pv of 9th year = 17000 * PVIF of 9th year = 170000* 0.33 = 56100

Pv of second contract = 63920+56100 = 120020

Total of two contracts = 120020 + 1524900 = 1644920

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