You are in business negotiations with Mr. Mohammed Ezekiel Abedube, a Nigerian p

Question

You are in business negotiations with Mr. Mohammed Ezekiel Abedube, a Nigerian prince who you met on the Internet after he sent you an unsolicited e-mail. In exchange for your assistance, he promises you quarterly payments of $200,000 (at the end of each quarter) for 2 years and then an annual payment of $1,000,000 (at the end of each year) for years 3 through 10. If you consider the time value of money to be 8% and assuming that he makes good on his promise, what are his future payments worth to you today?

Explanation / Answer

Solution :

YEARS

PV

1-2 YEAR

   1,465,096.29

3-10 YEARS

   4,926,816.65

TOTAL PV OF PAYMENT

   6,391,912.94

PV of payment received in first 2 years is as follows

PV = PMT x [(1 – (1+r) -N )) / r]

PMT= quarterly PAYMENT=200000, PV = PRESENT VALUE, r = interest rate=.08/4=.02, n=number of payment =2*4=8

PV =200000 x [(1 – (1+.02) -8 )) /(.02)

PV of first 2 years receipts =1465096.29

PV of amount received from 3-8years is as follows :

Year

Discount factor 8%

formula

Receipt

PV

3

0.793832241

1/(1.08^3)

1000000

       793,832.24

4

0.735029853

1/(1.08^4)

1000000

       735,029.85

5

0.680583197

1/(1.08^5)

1000000

       680,583.20

6

0.630169627

1/(1.08^6)

1000000

       630,169.63

7

0.583490395

1/(1.08^7)

1000000

       583,490.40

8

0.540268885

1/(1.08^8)

1000000

       540,268.88

9

0.500248967

1/(1.08^9)

1000000

       500,248.97

10

0.463193488

1/(1.08^10)

1000000

       463,193.49

total

   4,926,816.65

YEARS

PV

1-2 YEAR

   1,465,096.29

3-10 YEARS

   4,926,816.65

TOTAL PV OF PAYMENT

   6,391,912.94

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