Answer:
:
The contract is worth $1,622,970,237.98
Explanation:
Given
Number of Years = 12
Initial Price = $389
Initial Units = 500,000
Unit Increment = 2%
Price Decrement = $7.5
At Year 0:
$389 * 500,000 = $194,500,000
The Initial price would continue to decrease by $7.5
And the Initial units would continue to increase by 2%.
So,
At Year 1:
($389 - $7.5) * (500,000 * 2% + 500,000)
= $381.5 * 510,000 = $194,565,000
At Year 2:
($381.5 - $7.5) * (510,000 * 2% + 510,000)
= $374 * 520,200 = $194,554,800
At Year 3:
($374 - $7.5) * (520,200 * 2% + 520,200)
= $366.5 * 530,604 = $194,466,366
At Year 4:
$359 * $541,216 = $194,296,5736
At Year 5:
$351.5 * $552,040 = $194,042,2017
At Year 6:
$344 * $563,081 = $193,699,9368
At Year 7:
$336.5 * $574,343 = $193,266,3649
At Year 8:
$329 * $585,830 = $192,737,96810
At Year 9:
$321.5 * $597,546 = $192,111,13011
At Year 10:
$314 * $609,497 = $191,382,12412
At Year 11:
$306.5 * $621,687 = $190,547,113
Calculating present worth of contract (at 6%)
By adding the result of 0.06 * present value at each year.
Net Present Value = $1,622,970,237.98
