Question

An R&D lab will receive $250,000 when a proposed contract is signed, a $200,000 progress payment at the end of Year 1, and $400,000 when the work is completed at the end of Year 2. What is the present worth of the contract at 15%?

Answer 1

Answer:

Explanation:

As the Research and Development are considered expenses this is a net worht (all cashoutflow)

We solve this usng the present value of a lump sum

$\frac{Maturity}{(1 + rate)^{time} } = PV$

$\frac{-200,000}{(1 + 0.15)^{1} } = PV$

$\frac{-400,000}{(1 + 0.15)^{2} } = PV$

We now add them together and get the resent net work discounted a 15%

discount rate 0.15

# Cashflow Discounted

0 -250000   -250,000

1 -200000     -173,913.04

2 -400000    -302,457.47

   Total net worth:  -726,370.51