Question

For a contract that would last for the next 2 years, we are going to be paid at the end of every 4 months where the payments are expected to be K2400, K2900, K4200, K3800, K3500 and K4000. Assuming that the inflation is running at 25% p.a, what is the net present value of the contract?​

Answer 1

Answer:

Step-by-step explanation:

Equivalent rate of interest(ie )

= (1+i)^3-1=0.25

=(1+i)^3=1.25

=i=$\sqrt[3]{1.25}$-1=0.077217=7.722%

Therefore, the Net Present Value (NPV) is

NPV 2,400*1.07722^-1, 2,900*1.07722^-2, 4,200*1.07722^-3, 3,800*1.07722^-4+3,500*1.07722^-5+4, 4,000*1.07722^-6

=2,227.96+ 2,499.13+ 3,359.98+ 2,822.06 +2,412.94+ 2,559.96

=K15,882.03

Answer 2

At an inflation rate of 25% p.a, the net present value of the contract with the cash inflows herein is K15,568.81.

How is the present value determined?

The present value represents the discounted value of the future cash inflows at an annual inflation rate of 25%.

With an online finance calculator, the present values can be computed as follows:

Data and Calculations:

N (# of periods) = 6

I/Y (Interest per year) = 25%

PMT (Periodic Payment) = $0

FV (Future Values) = K2,400, K2900, K4200, K3800, K3500 and K4000

Present Value of K2,400 = K2,215.38 (K2,400/1.083336)

Present Value of K2,900 = K2,471.01 (K2,900/1.173609)

Present Value of K4,200 = K3,303.41 (K4,200/1.271413)

Present Value of K3,800 = K2,758.89 (K3,800/1.377366)

Present Value of K3,500 = K2,345.62 (K3,500/1.49214)

Present Value of K4,000 = K2,474.50 (K4,000/1.61649)

Net Present Value = K15,568.81

Thus, the net present value of the contract is K15,568.81.

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