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valentinak56 [21]
3 years ago
6

Doris's Fashions has just signed a $2.2 million contract. The contract calls for a payment of $0.6 million today, $0.8 million o

ne year from today, and $0.8 million two years from today. What is this contract worth today if the firm can earn 8.2 percent on its money
Business
1 answer:
Pavlova-9 [17]3 years ago
4 0

Answer:

$2.02 million

Explanation:

We need to calculate the present value of Doris's contract given the following three cash flows:

Year 0 $0.6 million

Year 1 $0.8 million

Year 2 $0.8 million

interest rate = 8.2%

present value (in million) = $0.06 + ($0.8 / 1.082) + ($0.8 / 1.082²) = $0.6 + $0.74 + $0.68 = $2.02 million

*present value formula = future value / (1 + r)ⁿ

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