r 5 Ho @Oue Today at Noon ??? PV OF CASH FLOW STREAM are guaranteed, and they wo
ID: 2400172 • Letter: R
Question
r 5 Ho @Oue Today at Noon ??? PV OF CASH FLOW STREAM are guaranteed, and they would be made at the O end of each year. Terms of each contract are as follows: Contract 2 $2,500,000 $3,000,000 $4,500,000 ss,000,000 Contract 3 $6,000,000 $1,500,000 $1,500,000 s1,500,000 As his adviser, which contract would you recommend that he accept? Select the correct answer O a Contrat I gives the quarterback the highest present vae; therefone, he should accept Contract 1 O c Contract 1 gives the quarterback the highest futune value; thenefore, he should accept Contract 1 Check My Work 6 MacBook AirExplanation / Answer
There should be present value (PV) calculation for each contract (C). The contract having the highest PV should be recommended.
PV of C 1
Year
CF, $
5% discount factor (F) = 1/ (1 + 0.05) ^n [where n = years, 1, 2 ..]
CF × F ($)
1
3,500,000
0.952380
3,333,330
2
3,500,000
0.907029
3,174,601.50
3
3,500,000
0.863837
3,023,429.50
4
3,500,000
0.822702
2,879,457
PV
12,410,818
PV of C 2
Year
CF, $
5% discount factor (F) = 1/ (1 + 0.05) ^n [where n = years, 1, 2 ..]
CF × F ($)
1
2,500,000
0.952380
2,380,950
2
3,000,000
0.907029
2,721,087
3
4,500,000
0.863837
3,887,266.50
4
5,000,000
0.822702
4,113,510
PV
13,102,813.50
PV of C 3
Year
CF, $
5% discount factor (F) = 1/ (1 + 0.05) ^n [where n = years, 1, 2 ..]
CF × F ($)
1
6,000,000
0.952380
5,714,280
2
1,500,000
0.907029
1,360,543.50
3
1,500,000
0.863837
1,295,755.50
4
1,500,000
0.822702
1,234,053
PV
9,604,632
The 2nd contract should be recommended, since it has the highest PV.
Answer: b
Year
CF, $
5% discount factor (F) = 1/ (1 + 0.05) ^n [where n = years, 1, 2 ..]
CF × F ($)
1
3,500,000
0.952380
3,333,330
2
3,500,000
0.907029
3,174,601.50
3
3,500,000
0.863837
3,023,429.50
4
3,500,000
0.822702
2,879,457
PV
12,410,818
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