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19 November, 03:03

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 and real estate developments. A small consulting firm entered into a fixed-price contract with a large developer, resulting in a stable income of $260,000 per year in years 1 through 3. At the end of that time, a mild recession slowed the development, so that parties signed another contract for $190,000 per year for 2 more years. Determine the present worth of the two contracts at an interest rate of 10% per year. The present worth of the two contracts is determined to be $

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  1. 19 November, 03:23
    0
    = $894,329.13

    Explanation:

    The present worth of the contracts are the the present value of the streams of cash inflow discounted at the reacquire rate of return of 10%

    Present Value of First contract

    Present Value = A * (1 - (1+r) ^ (-n)) / r

    = 260,000 * (1 - 1.1^ (-3) / 0.1

    =$646,581.52

    Present Value of Second contract

    Present value in year 3

    = 190,000 * (1 - 1.1^ (-2)) / 0.1

    = 329,752.0661

    Present value in year 0

    PV in year 2 * (1+r) ^ (-n)

    329,752.0661 * (1.1^ (-3)

    =$247,747.60

    Total present worth of contracts

    =$247,747.60 + $646,581.52

    = $894,329.13
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